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Ch3 drury Part Two Cost accumulation for inventory valuation and pro ?t measurement Chapter Three Cost assignment Use with Management and Cost Accounting e by Colin Drury ISBN ? Colin Drury C a Assignment of direct and indirect costs ? Direct costs can be

Part Two Cost accumulation for inventory valuation and pro ?t measurement Chapter Three Cost assignment Use with Management and Cost Accounting e by Colin Drury ISBN ? Colin Drury C a Assignment of direct and indirect costs ? Direct costs can be speci ?cally and exclusively identi ?ed with a given cost object ?? hence they can be accurately traced to cost objects ? Indirect costs cannot be directly traced to a cost object ?? therefore assigned to cost objects using cost allocations ? Cost allocations process of assigning costs to cost objects that involve the use of surrogate rather than direct measures ? Surrogates known as allocation bases or cost drivers ? For accurate cost assignment allocation bases should be signi ?cant determinants of the costs i e cause- and-e ?ect allocations Use with Management and Cost Accounting e by Colin Drury ISBN ? Colin Drury C b Assignment of direct and indirect costs ? Allocation bases that are not signi ?cant determinants of the costs are called arbitrary allocations result in inaccurate cost assignment ? Tradditional costing systems use arbitrary allocations to a signi ?cant extent whereas more recent ABC systems rely mainly on cause-and-e ?ect allocations see Figure on slide a Use with Management and Cost Accounting e by Colin Drury ISBN ? Colin Drury C a Di ?erent costs for di ?erent purposes ? Manufacturing organizations assign costs to products for Inventory valuation and pro ?t measurement Providing information for decision-making ? For inventory valuation and pro ?t measurement the aim is to allocate costs between cost of goods sold COGS and inventories Accurate individual product costs are not required ?? only an accurate allocation at the aggregate level between inventories and COGS Use with Management and Cost Accounting e by Colin Drury ISBN ? Colin Drury C b Di ?erent costs for di ?erent purposes ? For decision-making more accurate product costs are required ? Di ?erent cost information is required for inventory valuation and decisionmaking but most companies use a single database and extract di ?erent costs for di ?erent purposes ? Companies can choose to maintain their database using costing systems that vary on a continuum from simplistic to sophisticated the choice should be based on costs versus bene ?ts criteria ?? See Figure on slide a Use with Management and Cost Accounting e by Colin Drury ISBN ? Colin Drury C a Use with Management and Cost Accounting e by Colin Drury ISBN ? Colin Drury C b Use with Management and Cost Accounting e by Colin Drury ISBN ? Colin Drury C a Assigning indirect costs using blanket overhead rates ? Some ?rms use a single overhead rate i e blanket or plant-wide for the organization as a whole Example Total overheads Direct labour or machine hours Overhead rate ? ? per hour Use with Management and Cost Accounting e by Colin Drury ISBN ? Colin Drury C b ? Assume that the company has separate departments and costs and hours