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The Need for Cost Accounting and Allocation A product or a service cannot be provided without costs going into its creation - Benefits of Cost Allocation in an Organization Essay introduction.
The ability to transform a raw material into the final product, whatever the final product may manifest, is unavoidably connected with a cost. Often costs are incurred in a manner that is not even directly related to the making of the final product but to activities that are necessary for the production process.
Activities such as Cost behavior and allocation essay and administration come under the support activities that are not directly related to the creation of a product or service but they are necessary for a organization to operate.
Often a situation arises when a cost becomes attached to more than one product or department. The question as to whom to ascribe a cost to when more than one party seems responsible for the charge had been a highly problematic issue for accountants for long while.
Many schools of thought have sprung up with regard to this dilemma. Others were of the view that there is no need to allocate costs at all. The introduction of Activity Based Costing further pushed cost allocation into the background Doost, However, Activity Based Costing had a major shortcoming in that not all cost incursion are clear-cut enough to be charged to the ultimate users.
The need to allocate costs in the face of multiple users remained. Cost allocation is also known as cost apportionment and cost distribution.
Defining Cost Allocation Cost allocation is the process of accounting developed to deal with a situation in which assigning costs to a particular product or department is difficult. The process involves identifying and linking the costs incurred with the cost objectives.
Cost allocation consists of three main steps: Accruing the costs linked to the object Determining a method to link the object with the accrued cost The cost object can be thought of as an activity or a process, a product or service or even a part of the organization for which a separate measure for costs is required.
Definition of the object is based largely on the needs and circumstances of the organization.
After costs are incurred, they undergo an appraisal and are assigned to various pools depending upon a criterion that has been determined to link costs to the object. The costs are of two types; direct and indirect Ijiri, Direct costs are traceable to the cost object through a highly objective, uncomplicated relationship.
Indirect costs are the real purpose of cost allocation and are cost incurred without any traceable source. They must be assigned according to some bridging activity that will form the link between costs and cost object. The Benefits of Cost Allocation Most literature follows the disadvantages of cost allocation and shows why it should not be used.
However, cost allocation continues being used in numerous organizations. Two authors, Horngren and Kaplan have been the exceptions in relating this aspect and Zimmerman builds on their work to show, that in spite of what research, what benefits are derived from cost allocation which makes it popular among the practitioners.
Horngren and Kaplan refer to the benefits to managerial behavior.Cost allocation is a very important part of cost measurement.
It is a pricing process that within the organization where managers allocate the costs of all the departments. Within healthcare organizations the overhead costs, costs from patient services departments, and support costs have to be allocated.
I am a Principal Researcher at Microsoft Research New York City, where I work on political economy and social technology. My recent book with Eric A.
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Cost Management Plan The risk management tool that I would like to discuss is the cost management plan.
The definition according to PMBOK is “a document that sets out the format and establishes the activities and criteria for planning, structuring, and controlling the project costs”.
Updated 13 March, The Tragedy of the Commons by Garrett Hardin, Published in Science, December 13, For copyright permission, click here.. The author is professor of biology, University of California, Santa Barbara.
Published: Mon, 5 Dec Logistic is defined as a business planning framework for the management of material, service, information and capital flows.
It involves the management of complex information flow, communication, distribution, and control systems that are required in today’s business environment. Analyze the complexness of cost behaviours in wellness attention organisations and depict how costs are classified harmonizing to their relationship with volume.
Health services directors are vitally interested in how costs are affected by alterations in volume. Before costs can be managed. one must hold an apprehension of how and why costs are being incurred.