Question

A company is considering the use of a single-stage cost allocation process. under what conditions would this choice be justified?

Answer 1

The company produces a few products with similar characteristics in a few departments.

Allocation criteria should relate to the production volume of a particular product type and the entire production process. Ideally, the basis for a particular type of product should be determined and calculated using direct methods.

The four main purposes of cost attribution are to predict the economic impact of planning and control decisions; to motivate managers and employees; to measure the cost of inventory and the cost of goods sold; justify the cost of the refund.

The allocation basis must be the cause or factor for allocating the costs. a good indication that the allocation basis is good is if the change in the allocation basis approximates the change in the actual cost. so as machine utilization drops, so does the actual cost of running the machine.

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