Question from CIMA ( Cost Accounting)

Cost allocation
To allocate the cost, we would consider those overhead expenditure which cannot be directly assigned to products. These can be indirect materials, indirect labours and indirect expenses.

Purposes
1. Financial reporting--costs are tracked back to each product in order to allocate the costs incurred during a period between the cost of goods sold and the inventories. In this case, only the manufacturing overheads are allocated to products and the non- manufacturing overheads are treated as period costs.

2.Decision making--product costs are required for determining the prices and the profitability of products. As more accurate costs are required for decision making, all costs including non-manucaturing overheads should be taken into consideration.

Cost apportionment
A. Two-stage method
1st stage: overheads are assigned to the cost centre, which are the production or service locations such as departments.
2nd stage: a cost driver or an allocation base is selected.

B. Blanket overhead rate
Only one single oberhead rate will be assigned to all overhead rate.

Cost absorption
Procedures of overhead allocation
1. assign all factory overheads to cost centres
2. Rellocate service -cenre overheads to production cost centres
3.calculate separate overhead absoption rate for each cost centre
4. Assign cost-centre overhead to products

Activity- based costing
It asserts that products create demand for acticities and activities bring abotu the costs to be incurred.
Steps:
1. Identify major acitvities performed by the business.
2. Calculate the total cost of each acitivy over the period
3.Determine the cost driver for each activity. Cost drivers are the factores whtich cause the activity cost pool to increase.
4. Calculate the cost driver reate.
5. Assign the cost-centre overheads to the products according to their cost dricer rates.

blanket price