Investigate and report on an organisation\'s method of allocating electricity co
ID: 2591048 • Letter: I
Question
Investigate and report on an organisation's method of allocating electricity costs You can use any organisation with which you are familiar. Consider the following: 1. Does the organisation allocate the total costs of electricity? 2. If so, what is the basis for the allocation of the total cost of electricity incurred for a period? 3. Calculate the percentage and cost of the total cost for each allocation Complete a report that you could provide to management about your findings and include within it an executive summary. Make recommendations to management about the appropriateness of the methods of allocating costs and provide reasons for your conclusions within the report. 40 marksExplanation / Answer
Organization studied ABC limited
ABC limited is a Multi National Company having its branches in the United States and overseas.
Cost allocation is the process of identifying, aggregating, and assigning costs to cost objects. A cost object is any activity or item for which you want to separately measure costs. Examples of cost objects are a product, a research project, a customer, a sales region, and a department. Cost allocation is used for financial reporting purposes, to spread costs among departments or inventory items. Cost allocation is also used in the calculation of profitability at the department or subsidiary level, which in turn may be used as the basis for bonuses or the funding of additional activities. Cost allocations can also be used in the derivation of transfer prices between subsidiaries.
ABC Limited- Allocation of electricity costs
Entire electricity cost is first paid by the head quarters and then it is allocated amongst all profit centers to arrive at the correct profitability measurement of each profit centre/branch.
Basis of allocation
Units consumed by each product
Detailed calculation working
Total Electricity costs: $ 10,000
Per product costs 2 units of electricity
Executive summary
Cost allocation (also called cost assignment) is the process of finding cost of different cost objects such as a project, a department, a branch, a customer, etc. It involves identifying the cost object, identifying and accumulating the costs that are incurred and assigning them to the cost object on some reasonable basis.
Cost allocation is important because it the process through which costs incurred in producing a certain product or rendering a certain service is calculated. If costs are not accurately calculated, a business might never know which products are making money and which ones are losing money. If cost are misallocated, a business may be charging wrong price to its customers and/or it might be wasting resources on products that are wrongly categorized as profitable.
Typical cost allocation mechanism involves:
Cost object is an item for which a business need to separately estimate cost.
Cost pool is the account head in which costs are accumulated for further assignment to cost objects.
Cost driver is any variable that ‘drives’ some cost. If increase or decrease in a variable causes an increase or decrease is a cost that variable is a cost driver for that cost.
Cost allocation base is the variable that is used for allocating/assigning costs in different cost pools to different cost objects. A good cost allocation base is something which is an appropriate cost driver for a particular cost pool.
Conclusion
on the basis of information scuitinized by us, company's method of allocating electricity on the basis of number of products manufacturd in a period. it helps in getting the true cost of a product and to determine the price accordingly. in turn, it helps in relfecting true and fair view of performance of profit center and the financial statements.
Profit Center Product Nos Units consumed Electricity costs % Cost X 100 200 32,258 32% Y 120 240 38,710 39% Z 90 180 29,032 29% TOTAL 310 620 100000 100%Related Questions
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