ACC202 CASE, SLP, TD MODULE 4

Module 4 - Home

Allocating Fixed Costs and Budgeting

Modular Learning Outcomes

Upon successful completion of this module, the student will be able to satisfy the following outcomes:

•Case ◦Compare cost allocations methods.

◦Analyze a budget.

•SLP ◦Prepare a segmented income statement.

•Discussion ◦Demonstrate knowledge of transfer pricing.

◦Prepare and submit a Reflective Essay.

Module Overview

Allocations

A frustrating problem for many businesses is the handling of fixed costs that are shared by different divisions or products. This issue is becoming more and more important since many companies have huge fixed costs these days. In addition, the complexity and variety of products and services offered in our economy make it harder to accurately assess the cost of making a product or provide a service.

A century ago, variables costs for material and labor accounted for most expenses. Today, companies build factories that may cost billions of dollars. Even for a smaller business such as a fast-food restaurant, fixed costs are high.

The best approach is to allocate these costs on a reasonable basis in an attempt to estimate the unit cost of making a product or providing a service. This is a very important concept for managerial accounting purposes. However, managers need different information for different purposes. There is no single income statement or approach that provides all the information needed for every potential situation. Activity-Based Costing (ABC) and Lean Manufacturing are two current approaches used by businesses to understand and allocate costs. The idea is to gain a better understanding of how various products and services use corporate funds. With that information, managers can make better decisions.

Budgeting

Budgeting is a powerful financial tool for planning and control. The most effective financial budget includes both short-term and long-term goals. Budgeting is important, but the plan must be anchored by a underlying strategic plan.

Budgets are used for (1) planning and (2) control.

A static budget is prepared at the beginning of the budgeting period and is valid for only the planned level of activity. It is suitable for planning, but it is inadequate for evaluating how well costs are controlled because the actual level of activity is unlikely to equal the planned level of activity.

A flexible budget provides estimates of what costs should be for any level of activity within a specified range. When used for performance evaluation purposes, actual costs are compared to the same level of production.