Secondary Cost Allocation in Cost Accounting
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Secondary Cost Allocation
The secondary cost allocation can take two forms:
Direct Redistribution
The expenses of auxiliary sections are transferred directly to the main sections. It's simple and fast but does not take into account the possible benefits that may occur between the auxiliary sections.
Indirect Redistribution
This procedure takes into account possible benefits from auxiliary sections. Part of the cost of the auxiliary sections is moved to other auxiliary sections before the final distribution of the remaining sections.
Two Types of Indirect Redistribution
- Unilateral Cascade: First, sections are sorted in increasing order of importance in terms of expenses absorbed or higher, depending on the amount supplied. It then moves the cost of the first support section to the next, and so on, without worrying at all about the services provided to the preceding sections. This method sins of imprecision, but it is quick and simple.
- Mutual Allocation: This form should be used when there is sharing of mutual benefits between different auxiliary sections.
Auxiliary 1 <> 2
Types of Allocation
- Distribution Key: Rules or codes are used for allocation that, somehow, have regard to their mutual benefit.
- Mathematical Methods: This is to establish a system of n equations with n unknowns, where "n" is the number of sections with mutual benefits.
Approximate Costs
Consists in using approximate costs for making the transfer. As approximate costs are shared, it may be that auxiliary sections are not completely devoid of cost, either because costs have been allocated by default or by excess. These differences can be given the following treatments:
- Sharing between the main sections, using the same allocation keys.
- Pick up an account of waste costs of sections.
Allocation Table
Once the sub-allocation has been done, proceed as follows:
- Divide the total cost of the main sections by the number of units of work, thus providing the cost of the unit of work.
- At this cost, taking into account the number of units of work consumed by the product, indirect costs of the sections are charged to the cost of manufactured products. This is being done through the allocation table.
The Charging Phase Can Be Decomposed into the Following Stages:
- Determine the total costs that are attributable to each section.
- Select the unit of work for each section.
- Determine the number of units of work performed by each section.
- Calculate the unit cost of the unit of work.
- Determine the units of work consumed by product section.
- Calculate the amounts to be charged to the accounts of costs and cost prices.