How Cost Allocations Affect Decision Making
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How could cost allocation methods influence decisions of an organization?
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Solution Summary
An essay describing how cost allocations can affect business decision making.
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Cost allocation methods are one of the most important considerations when formulating a metric to determine the overall profitability of a business unit (in services industries) or product (in a manufacturing environment).
An inaccurate cost allocation can give a false impression as to how profitable one product is relative to another. An example could be a manufacturer who makes two products in one plant. One product is labor intensive (requires many man hours to produce) and the other is technologically intensive (requires few man hours, but lots of machine hours). Remember that one of the attractions of ...
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