Quiz 7: Cost Allocation: Departments, Joint Products, and By-Products

Business

The objectives in the strategic role of cost allocation area as follows- 1. To evaluate the cost efficiency of the departments and the profitability of products for the preparation of financial statements and tax compliances. The evaluation would require the determination of the accurate product and departmental costs. 2. Motivation of the Managers for achievement of the Top Management Goals. 3. To reward the managers with incentives for making decisions appropriate for achieving goals of the Management. 4. To ensure that the rewards to the managers are fair for the efforts and effectiveness in the decisions taken by them.

Joint Product Costing: Joint product costing refers to the costing of the production process where more than one unit is produced as a result of single manufacturing process. Joint product costing is generally seen in manufacturing industries only. Example of joint product industry is petroleum industry which processes crude oil and it results into gasoline, kerosene, fuel oil etc. Difference between Joint product and by product: 1. Joint products are produced with the same input and have high or similar value whereas; by product have relatively very small value in comparison to the total sales value of the products. 2. Joint products are deliberately produced because they have a very significant high value whereas, by product are produced as a consequence of production process. 3. Joint products have similar economic value, whereas by products economic value is less than the main product. 4. Joint products may be required to further process to be converted into finished goods but by products does not require any further processing as it already has very insignificant value.

Departmental Cost Allocation: Departmental cost allocation refers to the allocation of overhead expenses in the department. This approach recognizes that manufacturing operation is divided into production department and support department. Hence, cost allocation is used to allocate indirect expense between production department and support department. Usage of "Reciprocal" term in departmental cost allocation: As mentioned above departmental cost allocation is done between production department and service department. However, an organization can have more than one service department which receives services from each other. Hence, "reciprocal" term is refers for the flow of service between different service departments of the organization. This flow can be both back and forth. Example of "Reciprocal" flow in service department: Say in an organization there are three service departments as Human resource departments, Maintenance department and other support to production department. Now, HR department gives services to maintenance department and maintenance department will require the service of HR department. Further, other support to production department will require service from both HR and maintenance department. Hence, each service department requires the service of other department as well.