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1、Confirming Pages231Cost Allocation: Departments, Joint Products, and By-Products After studying the chapter, you should be able to . . . 1. Identify the strategic role of cost allocation 2. Explain the ethical issue of cost allocation 3. Use the three steps of departmental cost allocation 4. Explain
2、 the problems in implementing the different departmental cost allocation methods 5. Explain the use of cost allocation in service firms 6. Use the three joint product costing methods 7. Use the four by-product costing methods In keeping with their firms mission of continual improvement in their prod
3、ucts and serv- ices, General Electric (GE) and many other firms such as Ford Motor Company, Johnson square feet or labor costs, however, do not have a clear relationship to maintenance costs. In some situations, cause-and-effect bases are not available and alternative concepts of fairness are used.
4、One such concept is ability-to-bear, which is commonly employed with bases related to size, such as total sales, total assets, or the profitability of the user depart- ments. Other concepts of fairness are based on equity perceived in the circumstance, such as benefit received, which often is measur
5、ed in a nonquantitative way. For example, the cost of a firms computer services might be allocated largely or entirely to the research and develop- ment department because the computer is more critical to this departments functioning and this department uses it more than other departments. The Ethic
6、al Issues of Cost Allocation A number of ethical issues are important in cost allocation. First, ethical issues arise when costs are allocated to products or services that are produced for both a competitive market and a public agency or government department. Although government agencies very often
7、 pur- chase on a cost-plus basis, products sold competitively are subject to price competition. The incentive in these situations is for the manufacturer, using cost allocation methods, to shift manufacturing costs from the competitive products to the cost-plus products. A second ethical issue in im
8、plementing cost allocation methods is the equity or fair share issue that arises when a governmental unit reimburses the costs of a private institution or when it provides a service for a fee to the public. In both cases, cost allocation methods are used to determine the proper price or reimbursemen
9、t amount. Although no single measure of equity exists in these cases, the objectives of cost allocation identified at the beginning of the chapter are a useful guide. A third important ethical issue is the effect of the chosen allocation method on the costs of products sold to or from foreign subsid
10、iaries. The cost allocation method usually affects the cost of products traded internationally and therefore the amount of taxes paid in the domestic and the foreign countries. Firms can reduce their worldwide tax liability by increasing the costs of products purchased in high-tax countries or in co
11、untries where the firm does not have favorable tax treatment. For this reason, international tax authorities closely watch the cost allocation methods used by multinational firms. The methods most acceptable to these authorities are based on sales and/or labor costs. 1 Cost Allocation to Service and
12、 Production Departments The preceding chapters on job costing (Chapter 4), activity-based costing (Chapter 5), and process costing (Chapter 6) provide a useful context for introducing cost allocation. Chap- ter 4 illustrated how overhead costs could be allocated to products in a single step, using a
13、 single overhead pool and single overhead rate in what we called the volume-based approach. Chapter 4 then showed an enhancement of the volume-based approach in which overhead was allocated to products in two steps, first to departments and then to products, in what we called the departmental approa
14、ch. The departmental approach is an improvement over the single- step volume-based approach because it takes into account differences in costs incurred in the different departments and differences in consumption of the departments resources by the products, thus leading to more accurate product cost
15、s. The activity-based approach, explained in Chapter 5, follows a two-step approach like the departmental approach, with the difference that it assigns costs at a much more detailed level that of the operating activity rather than the department. Because of the greater level of detail, the activity-
16、based approach captures more accurately the usage of resources by the different 1 For example, Glaxo SmithKline, a pharmaceutical company, settled a transfer-pricing dispute with the IRS for $5.2 billion. The dispute involved intercompany transactions and related transfer prices for the period 19892000. Also, Joanna Faith, “Transfer Pricing Helps Tax Avoidance, Says GAO Study,” International Tax Review, September 2008; “Comparison of Tax Liabil
