describe the cost allocation process

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describe the cost allocation process

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Answer 1

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Cost allocation process is about allocating indirect costs to a product /service. There are 4 steps in cost allocation process-

1. Identify a particular indirect cost pool. For example - administrative overheads = $120000

2. Identity relevant cost driver. Cost driver is the relevant and appropriate factor on the basis of which allocation is done. For example = cost driver may be labour hours = 4000 labour hours.

3. Calculation of allocation rate = Allocation rate is derived by dividend cost pool by cost driver.

Allocation rate = $120000/4000 labour hours

= $30 per labour hour.

4. Calculation of allocation amount = In this step, cost is to be allocated to a particular product or operation on the basis of quantity or any other measurement of cost driver of a product or service.

For example- Product A = Total 1500 labour hours

= Administrative overhead allocated to Product A

= 1500 labour hours × $30 / labour hour

= $45000

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Answer 2

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describe the cost allocation process

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