Finish Swiftly Using Fully Allocated Costs for Decision Making Sales Variances Homework
Cost allocation deals with allocating costs to various areas of accounting procedures. Allocating costs to different sectors of production helps to ascertain the actual cost incurred to manufacture a product or service. Fully allocated costs help managers to determine costs as well as make business decisions.
Let us understand fully allocated cost
Fully allocated cost includes all the fixed and variable costs that are utilized while producing a product or service. Hence, it also consists of costs which are not directly related to the product or service.
Direct costs: The costs directly related to the product or service such as direct labor, direct material, etc. Direct costs are variable costs and change with the change in quantity.
Indirect costs: The costs have no significant relation to the product or service. Indirect costs include fixed costs like labor hours, machine hours, etc.
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Importance of fully allocated cost in decision making
Cost allocation is an important aspect of any business organization. Dividing costs properly among the various departments enables a business to run smoothly and reap profits in the long term. Therefore, it is necessary that managers use the proper methods to allocate costs among all the components of the business. You can know about the importance from using fully allocated costs for decision making sales variances homework help.
- It contributes in determining the exact cost incurred in each department. If few units use the same resource, it allows a business to distribute the cost associated with that resource evenly among the concerned departments.
- Cost allocation enables optimum utilization of resources with very less to no wastage.
- It helps to determine the cost object. Cost object indicates the cost assigned to. For example, department, customer, etc.
Impact of fully allocated cost on sales variance
Sales variance is the difference between the actual sales and the budget sales (estimated sales). Using fully allocated costs for decision making sales variances assignment help assists you to determine how business use different methods to allocate costs to determine sales.
- Direct Method
- Step-Down Method
- Reciprocal Method
These methods assist in determining the actual expenses incurred while manufacturing a product or a service. This, in turn, affects the sales of the business. When the actual sale is more than the budget sale, the company earns a profit and when the actual sale is less than the budget sale the company suffers loss.
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