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Cost Accounting: Methods in Certain Situations

Companies can choose among a few allocation methods.

Do some methods make more sense in certain situations than others?

Explain by describing at least two allocation methods and when they make more sense or less.

Solution Preview

(1) Yes, some methods are more appropriate than others in different situations. Let's take a look at some of those:

(2) Activity Based Costing (ABC) method is an accounting technique that allows an organization to determine the actual cost associated with each product and service produced by the organization without regard to the organizational structure.
In order to achieve the major goals of business process improvement, process simplification and improvement, managers need to fully understand the cost, time, and quality of activities performed by employees or machines throughout an entire organization. ABC methods enable managers to cost out measurements to business simplification and process improvement.
Activities can be defined as a named process, function, or task that occurs over time and has recognized results. Activities use up assigned resources to produce products and services. Inputs are transformed into outputs under the perimeters set by controls performed by the organization's employees and their tools. Activities can be perceived as consumers of resources in production of materials, services, events, or information. Activities are the common denominator between business process improvement and information improvement.
An important function of ABC is for the organization's activities to be defined as value added or non-value added. Value added activities are those for which the customers are usually willing to pay (in some way) for the service. Non-value added are activities that create waste, result in delay of some sort, add costs to the product/s, or for which the customer is not willing to pay.
Resources are assigned to ...

Solution Summary

This solution explains in detail why certain cost accounting methods work better than others in certain situations.

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