- Allocation of indirect costs is an allocation that happens in the mids of the department, e.g. how much of the salary of the director ought to be assigned to each of the managers, that are working for him.
- Allocation of costs from cost center or one particular department to another department, e.g. cleaning services in a company can allocate its cost to cost centers or many other departments. What is more, they might also be allocated to the particular employee.
Allocation of joint costs
Joint costs are causing a lot of problems for accountants. It is very easy to make a bad choice by taking into consideration the full information about costs. When the possibility of joint cost is confirmed, we have to decide whether or allocated it or not).There are four principal purposes that needs to be filled, so we could allocate these costs (S.A. Finkler, D. M. Ward, J.J. Baker 2007,p.63):
- giving the full disclosure of information, when making a decision
- very effective technique for motivating staff
- External and internal reporting chain
- costs computation, reimbursement.
Some of the allocated costs are called overheads.This term addresses the ongoing business expenses, which are not applied to making a product or service. This means they are mainly indirect and are impossible to associate with any specific employee. They are also in the need of allocation to employees and some form of aggregation. It is as crucial for budgeting purposes as for estimating how much an enterprise ought to surcharge for service or product. There are events, when the overhead requires joint costs, e.g. the salary of the accountant because every employee is depending on his work. Although sometimes the costs might be assigned to one particular employee, the expenses of gathering the data on that topic are very high (S.A. Finkler, D. M. Ward, J.J. Baker 2007,p.51).
The Overhead Application Process
The Overhead Application Process consists of 6 operations (S.A. Finkler, D. M. Ward, J.J. Baker 2007,p.56):
- choosing the base for allocating costs to employee or department
- regulating budgeted cost and volume
- figuring out the overhead rate
- assessing the accurate base
- administering the budget overhead application rate to the accurate number
- clarifying year-end differences between certain total overhead and measure of the overhead applied during the year.
The reason for cost allocation
The main reason for allocating costs is to assign the costs as close to one specific employee as it is possible. There is a need for assigning a cost to another department and then to an employee. Sometimes, departments decide to change the order of operation and start with allocating cost to one employee (S.A. Finkler, D. M. Ward, J.J. Baker 2007,p.51).
- Drury C., (2005), Management Accounting for Business, Cengage Learning EMEA, United Kingdom
- Finkler S.A., Ward D. M., Baker J.J., (2007), Essentials of Cost Accounting for Health Care Organizations, Jones & Bartlett Learning, USA
- Mowen M. M., Hansen D. R., Heitger D. L., (2011), Cornerstones of Managerial Accounting, Cengage Learning, USA
- McLean R., (2002), Financial Management in Health Care Organizations, Cengage Learning, USA
- Penner S.J., (2013), Economics and Financial Management for Nurses and Nurse Leaders, Springer Publishing Company, USA
Author: Witold Urjasz