12-9 What is the danger in allocating common fixed costs among products or other segments of an organization? Answer The danger is that such allocations can make a product line or other segment of organization appear to be unprofitable, whereas in fact the line may be profitable.
What are the main purposes of allocating it costs to user departments?
The four main purposes for allocating costs are to predict the economic effects of planning and control decisions, to motivate managers and employees, to measure the costs of inventory and cost of goods sold, and to justify costs for pricing or reimbursement.
Why are common costs an issue in segment reporting?
TRACEABLE AND COMMON COSTS Traceable costs arise because of the existence of the particular segment. Traceable costs would disappear if the segment itself disappeared. Common costs support more than one business segment but are not traceable, in whole or in part, to any one of those segments.
Why is manufacturing overhead considered an indirect cost?
Definition of Manufacturing Overhead It includes the costs incurred in the manufacturing facilities other than the costs of direct materials and direct labor. Hence, manufacturing overhead is referred to as an indirect cost.
What is the need for cost assignment?
Cost assignment is the allocation of costs to the activities or objects that triggered the incurrence of the costs. The concept is heavily used in activity-based costing, where overhead costs are traced back to the actions causing the overhead to be incurred. The cost assignment is based on one or more cost drivers.
What are the three major influences on pricing decisions?
The three major influences on pricing decisions are customers, competitors, and costs. The customers influence pricing through their demand for product and services.
What are the advantages and disadvantages of segment reporting?
Segment reporting also allows stakeholders to get a better sense of the fluctuations that might affect overall numbers. If a business reports much higher earnings than expected, for example, segment reporting shows where those earnings are coming from.
What is the importance of segment reporting?
Segment reporting breaks down the operations of a company into manageable pieces, or segments. Public companies must then record detailed financial statements for each operating segment. The goal is to increase transparency for creditors and investors, especially regarding the company’s most important operating units.
What are indirect costs in manufacturing?
Indirect manufacturing costs are production costs that cannot be directly associated with a produced unit. Examples of these costs are supplies, depreciation, utilities, production supervisory wages, and machine maintenance.
