Question

Investigate and report on an organisation’s method of allocating electricity costs. You can use any organisation with which you are familiar.  5 pages

Consider the following:

1. Does the organisation allocate the total cost 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.

Answer 1

Cost allocation is the process of identifying, aggregating, and assigning costs to costobject. A cost object is any activity or item for which you want to separately measurecosts. Cost allocation is used for financial reporting purposes, to spread costs amongdepartments or inventory items. Cost allocation is also used in the calculation ofprofitability at the department or subsidiary level, which in turn may be used as the basisfor bonuses of the funding of additional activities. Cost allocations can also be used in thederivation of transfer prices between subsidiaries.Cost allocation is important because it the process through which costs incurred inproducing a certain product or rendering a certain service is calculated. If costs are notaccurately calculated, a business might never know which products are making money andwhich ones are losing money. If cost are misallocated, a business may be charging wrongprice to its customers and/or it might be wasting resources on products that are wronglycategorized as profitable.Corporate profile :1.ABC company is a candy manufacturer in Thailand.2.ABC company has 2 production lines ;a.Soft candy b.Hard candy3.Amount of Electricity to be allocated was $55,000.4.ABC company prefer to allocate electricity costs to its two products.5.Allocation Method ;a.Electricity Costs are allocated based on direct labor hours in each lineproduction.DescriptionSoft CandyHard CandyDirect Labor Hours1,500 Hours2,000 HoursRevenues$ 350,000$ 450,000Production Capacity70,000 Kg.90,000 Kg.When allocating costs, company must ensure that the costs are reasonable andhave appropriate documentation. The allocation method must be reasonable.

It must relate to the costs being charged. The documentation must show that the allocationmethod reflects project benefit in the percentages or amount indicated.