Why must costs be allocated

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Grand Canyon University *

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Economics

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Feb 20, 2024

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Why must costs be allocated? Explain why overhead costs, support department costs, or joint costs must be allocated to products, and give an example of a company that might allocate those costs. Cost allocation is an essential process that involves identifying, developing, and assigning expenses to a specific cost object such as products, departments, programs, or branches of an organization. Cost allocation is primarily used to determine price, reduce waste, and help in decision-making. For items to be successfully profitable, overhead, support department, or joint costs must be assigned to them. Apple has a variety of locations, including retail stores, research and development labs, and manufacturing locations. Overhead expenses such as facility maintenance, utilities, and general administrative expenses accumulate across the organization. Each product line's profitability has to be determined by allocating these expenses to it. Cost Allocation . (n.d.). Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/accounting/cost-allocation/ What is the split-off point? How would you approach a decision to sell joint products at the split- off point, or process those products further? Give an example of a well-known company that would have to make this decision and describe the products and split-off point(s). The split-off point is when joint products become separate and can be recognized as distinct products with their own values. Costs incurred up until the split-off point are considered joint costs, and each product can now be recorded individually. The split-off point is important for dividing up expenses among multiple products. At this point, companies have to determine whether to sell the items as is or with additional processing. Usually, the choice is influenced by factors such as market demand, profitability, and strategic goals. Processing costs play an important part in determining whether to sell joint products at the split- off point or continue processing them. It involves comparing the additional expenses of further processing the joint products with the possible benefits. It may be beneficial to continue processing if the higher processing costs are justified by an increase in market value, improved quality, or more market opportunity. An example of this would be a vegetable processing plant produces canned vegetables and vegetable juice from different vegetables. At the split-off point, they must determine whether to sell the items as they are or to continue processing them. Selling at this point means distributing canned vegetables and vegetable juice. However, additional processing can involve creating products with value-added like vegetable smoothies or soups, which would cost more.

Cost allocation is a process where the costs are identified, accumulated, and assigned to departments, products, programs, and branches of the company. Costs must be allocated because it is easier for companies to trace the specific profits and losses in the company. Overhead, support department and joint costs must be allocated because they assist in the decision-making process and help motivate the staff. An international software company like Axway uses a support department, and has overhead costs that consist of utilities, rent maintenance, insurance, technology, etc. They have certain joint costs within an event or a roadshow where they will have multiple clients for different products, but the event itself was only one cost that was useful for many different things. Ask an easy question the text doesn’t address regarding cost allocation You make a good point. In situations where multiple departments may benefit from the same cost, how does Axway decide which products or programs to prioritize or consider more significant when allocating costs? When Apple creates and sells the newest iPhone, they have to consider the operational expenses that come with it. These expenses are the everyday costs of running Apple's business. To determine how much of these expenses should be included in the iPhone's price, Apple considers a variety of factors, including facility maintenance, administrative expenses, and the tracking of the iPhone from manufacturing to consumers. They may decide how much of these costs should be assigned to the iPhone depending on factors such as the amount of space used for iPhone production or how much the iPhone contributes to Apple's overall revenue. This calculation helps Apple set a price that covers all the costs of producing and delivering the iPhone. The split off point is when a company can say it has produced two distinct, marketable products from its processes thus far. Deciding between selling products at the split off point or processing them further is determined by whether the costs of the further processes are made up by the selling costs of the processed goods. If the company can make its target profit from the joint goods and the processes required for additional goods costs more than those products can be sold for, then it is not worth it to further process them. However, if the further processed goods are more valuable and will be priced higher, it makes sense to produce them. The oil industry makes these decisions when they produce petrol, diesel, and crude oil from petroleum. Add additional information that is not already in the text, then ask a question regarding the split off point. Keep it short and simple Considering the dynamic nature of market conditions and the oil industry, where various factors come into play, including economic trends and consumer preferences, What role does market demand play in influencing

the decision to sell products at the split off point or process them further in the oil industry? The oil industry's decision-making process is heavily influenced by market demand, and with conditions constantly changing due to outside influences like consumer preferences and economic trends, how does market demand affect the choice of whether to sell products at the split off point or process them further? An example of a company facing this decision is a chocolate manufacturer like Hershey's. In the production of chocolate bars and cocoa powder, the split-off point could be when cocoa beans are processed into both products. The company must decide whether to sell the cocoa powder and chocolate bars as they are, recognizing revenue at the split-off point, or invest in further processing to create premium chocolate products with added ingredients. This decision would depend on market trends, consumer preferences, and the cost-benefit analysis of additional processing. The challenge lies in finding the balance between maximizing revenue and optimizing production costs to ensure profitability in a competitive market. In the process of making a turkey, the joint cost would be the quality control. This would be the Expenses related to quality control measures to ensure that the poultry meets safety and regulatory standards would be considered joint costs. On the other hand, separating cost would be the spilt off point. In this case that would be once the turkey is separated into the different parts that can be sold, like the leg, breast, wing, etc. finally, the organ meats like liver and heart become useful by-products, for additional income.

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