Accounting: Cost Driver Essay

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Managers need to know the costs of goods and services to help them make decisions that will enhance the organisations wealth. Some cost can be traced directly to products or responsibility centres, but othersare indirect and must be allocated. In this chapter the overhead costs are the indirect cost that can not be traced to cost objects. The term manufacturing overhead is used to describe indirect product costs; and non-manufacturing overhead is cost used to describe upstream and downstream costs. Cost object: Determine the product, service or department that is to receive the allocation. You can group customers or different department. Things that you are interested of knowing how much you need to pay to supply it. Cost pool: A grouping of individual costs, that some which is allocated using a common allocation base You only need to see if there is a connection. The cost must change proportionally with the cost driver and it must be easy to measure. Reciprocal services is a mutual service that are provided between two or more support departments and therefor it needs to be allocated to the different departments with the right amount of money. volume-based cost driver is a cost that assumes that costs are driven, or caused by, the volume of production. non volume-based cost driver is a cost driver not directly related to production volume. actual overhead rate is the actual amount of overhead divided by the actual volume of production budget volume is the budgeted volume of cost driver for the year two stages 1. Overhead costs are assigned to production departments (e.g machining) 2. Overhead costs are applied to products

Stage 1 - can be done i two ways, direct method or step down method. How cost can be allocated to departments. Though allocating cost to responsibility centres managers can understand the economic effect of their decisions. It encourages a particular pattern of resource usage. Your should translate the service to a department. You often start with service department that service most of the departments. 1.Direct method is a method of allocating support department costs where each support departments costs are allocated directly to production departments that consume part of the support departments output. You will not recognise the cost between support department. 2. Step down method, cost is going to be allocated to another support method and to the other service departments. Is a method of allocating support department costs that partially recognises services provided by one support department to another. First you should identify the cost driver, secondly measure the consumption of the allocation base in the production departments. thirdly allocate the support department cost based on the relative amount of the allocation base consumed in each production department. Before you continue with stage 2 you need to come up with total production costs, total cost for each department. Stage 2 - allocate overhead costs to products, can be done in two ways (abc is not going to be described) either by plant-wide overhead rate or by department overhead rate. Trace the cost from
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