Question

Choosing among alternative cost allocation methodologies typically is based on one of the following criteria: cause-and-effect, benefits derived, fairness, or ability to bear. Discuss how the “fairness” criterion can be used in selecting a cost allocation methodology.

Answer 1

Cost Allocation – basis , cause and Effect , Fairness system

Cost allocation is one of the important factor in any Organization. While allocation of cost , company needs to do following activity:

1. Cause and Effect analysis – here importance of Variable costing system . This approach of allocation of cost mainly used in ABC based costing . Under ABC base system , allocate of cost on the basis of cost driver .
2. Benefit received – While allocation of cost lie Advertisement , Manager opt for this method , This type of cost allocated on the basis of division revenue . Higher the revenue an higher the allocated

Cost

Normally Manager follow Cause and Effect + Benefit received basis to allocate the cost under economic decision .

Fairness basis – not so important basis to allocate of cost – this way of cost allocation mainly relates to Government contract . Under this method , cost allocated at reasonable and fair method to establish Selling price

In case of fair basis of cost allocation , it might get difficult because one party vire migt be fair but other parties view might be unfair

Fairness or Equally is not so preferred basis for Manager