Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 20

Cost Allocation, General

An organization’s service and administrative costs can be substantial, and some or all of these costs usually are allocated to cost objects. Thus, the allocations of service and administrative costs can have a significant impact on product cost and pricing, asset valuation, and segment profitability.

Required

1. What are service and administrative costs?

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2. When service and administrative costs are allocated, they are grouped into homogeneous pools and then allocated to cost objects according to some allocation base.

?a. Compare and contrast the benefit and cost criteria for selecting an allocation base.

?b. Explain what the ability-to-bear criterion means in selecting an allocation base.

Step 1 of 2

1.?Service and administrative costs are costs that are incurred by headquarters' staffs or other central units. In order to maintain the company as a functioning entity, administrative costs are incurred for the benefit of all units of the company. Service units generally exist to provide services to other units and, thus, are not as broad in nature as administrative costs.