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Cost tracing, allocation, drivers, and related issues

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Discuss the importance of cost tracing? Cost Allocation? How do they differ and how are them similar? Define a cost driver? Choose a day to day event that you might use these tools to properly budget yourself, and to see where you might be overspending or underspending.

Discuss what are the primary accounting methods a manufacturing company may use in product cost flows. Does cost allocation come into play when employing these accounting methods? When would a manufacturer choose one over the other? Is one better than the other? In one paragraph start a manufacturing company making lemonade, choose one of the primary methods of accounting to trace your costs of goods sold, then compare to the other primary method and determine which is better.

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Cost tracing is very important because it is the process that we use to assign direct costs. If our cost tracing is inaccurate, the direct costs assigned to our cost objects will also be inaccurate. When we allocate costs through the cost allocation process, it is equally important. When we're allocating costs, we're working with indirect costs and there are typically more indirect than direct costs, particularly for manufacturing and other large companies. If the cost allocation is not done correctly, indirect costs will be assigned to the wrong cost object and in this case, it can render a projection or forecast completely inaccurate due to the amount of indirect costs being assigned. The process is similar because we're going through the steps necessary to 1) determine if each cost is direct or indirect, 2) segregating the costs for cost tracing as opposed to cost allocation, 3) using cost tracing with the direct costs, 4) using cost allocation with the indirect costs. There is a major difference in how we assign the costs between cost tracing and cost allocation. When we use cost allocation with indirect costs, we are more liberal in assigning those costs, but when we use cost tracing, we are looking for a direct relationship between cause and effect -- the question that we are answering in cost tracing is, what specifically took place that caused the cost? We assign cost tracing more carefully and more exact than cost allocation.

A cost driver causes the cost of an activity to change. Cost drivers for a manufacturing company may include the machine hours for a specific product, the floor space that the product is produced on, and the power ...

Solution Summary

Discuss the importance of cost tracing? Cost Allocation? How do they differ and how are them similar? Define a cost driver? Choose a day to day event that you might use these tools to properly budget yourself, and to see where you might be overspending or underspending.

Discuss what are the primary accounting methods a manufacturing company may use in product cost flows. Does cost allocation come into play when employing these accounting methods? When would a manufacturer choose one over the other? Is one better than the other? In one paragraph start a manufacturing company making lemonade, choose one of the primary methods of accounting to trace your costs of goods sold, then compare to the other primary method and determine which is better.

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