The cost associated with employees need to be allocated individually, the cost of resources used by a group of individuals of a department should be allocated to the department and, finally, the costs associated with services used by all employees of a particular site need to be allocated to a business unit. This is why cost allocation matters. Cost allocation benefits businesses by managing the cost and avoiding unnecessary or unwarranted spend associated with IT and telecom assets and services.
It provides transparency of usage and clarity into costs and potential savings through identifying zero-usage and discrepancies on a continual basis. Now, how can you allocate your cost efficiently? TEM offers businesses a way to gain key insight into costs and usage associated with IT assets and services and allocate the costs by employees, department and business units for the entire company painlessly. A large part of why businesses choose to adopt some form of expense management solution is that it provides visibility into areas of work that can often fly under the radar.
Thus, in the African Bongo Corporation example above, the company could forbear from allocating the cost of its power station, on the grounds that none of the six operating departments have any control over the power station.
In such a situation, the entity simply includes the unallocated cost in the company's entire cost of doing business. Any profit generated by the departments contributes toward paying for the unallocated cost. Accounting Books. Finance Books. Operations Books. Articles Topics Index Site Archive. Part of doing business is incurring costs. While bookkeepers and accounting clerks may need some guidance in properly allocating expenses, using accounting software can help to automate and simplify the entire process considerably.
To track and allocate costs, the cost needs to first be associated with a specific cost object. One building is 4, square feet, while the other building is 8, square feet.
Your cost object is the square footage of each building, which will be used to allocate the cost to the correct building. Most businesses incur a variety of costs while doing business. These costs can range from the cost of materials needed to produce a finished product, to the direct labor wages paid to the employee running the machine used to assemble the product, to the overhead costs you incur every day simply by opening your doors.
Before you get started, familiarize yourself with the various types of costs your business is likely to incur. A direct cost is anything that your business can directly connect to a cost object. Tied directly to production, direct costs are the only costs that need not be allocated, but instead are used when calculating cost of goods sold. The most common direct costs that a business incurs include direct labor, direct materials, and manufacturing supplies.
An employee working the assembly line is considered direct labor , a direct cost. Same goes for the plastic needed to manufacture a toy, or the glue that holds pieces of the toy together. Direct costs are almost always variable because they vary based on production levels.
However, if production remains constant, direct costs may remain constant as well. Indirect costs are costs incurred in the day to day operations of your business. Indirect costs cannot be tied back to one particular product, but are still considered necessary for production to occur or services to be delivered.
Overhead costs , also known as operating costs are the everyday cost of doing business. For example, rent, insurance, and office supplies are considered overhead costs, which are costs incurred regardless of production levels. Some overhead costs such as supplies and printing can be variable, while others, such as rent, insurance, and management salaries are all fixed costs , since the cost does not change from month to month.
Like indirect costs, overhead costs will need to be allocated regularly in order to determine actual product cost.
There are plenty of reasons other companies may need to allocate costs. In the examples below, we used the square footage and the units produced methods to calculate the appropriate cost allocation. Ken owns a small manufacturing plant, with administrative offices housed on the second floor. Rent must be allocated between the two departments.
Using the number of units produced as the allocation method, we can calculate overhead costs using the following overhead cost formula:. If Carrie did not allocate the overhead costs, she probably would have underpriced the backpacks, resulting in a loss of income.
No, cost allocation is necessary for any business including service businesses and nonprofit organizations. To track and allocate costs, the cost needs to be identified with a cost object, which costs are assigned to. Cost objects can include:. While larger companies may have a greater need to allocate costs, smaller businesses can also benefit from allocating costs properly.
For example, even a small car repair shop will need to allocate parts and labor costs properly, while a small consulting business will need to allocate travel costs to the appropriate customer.
Cost allocation is important for any business, large or small. How can you determine how much to charge for goods or services if you have no idea how much it costs to produce the goods or services you currently offer your customers? Properly allocating costs is also essential for accurate financial reporting. Finally, allocating costs properly can help you identify profitable areas of your business and products or services that may be losing money, enabling you to make proactive decisions regarding both.
While some allocation methods might have the objective of being as fair as possible to each cost object, others might have the objective of influencing the behavior of managers and employees.
For example, basing allocation on the number of employees in a department might cause department managers to avoid hiring needed employees, or even to lay off workers to reduce department size. Jean Marie Bauhaus has been writing about a wide range of topics since Her articles have appeared on a number of popular websites, and she is also the author of two urban fantasy novels.
By Jean Marie Bauhaus.
0コメント