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Management Accounting Best Practices: A Guide for the Professional Accountant by Steven M. Bragg

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Chapter 8

Cost Allocation Decisions

At a basic level, the allocation of overhead costs is simply a response to meet the requirements of various accounting standards. However, overhead allocation can also be used (and misused) to arrive at a number of decisions, such as the profitability of products, customers, and operating divisions. This chapter shows how to properly use cost allocation through the use of activity-based costing, while also revealing several flaws in the use of any allocation technique that can result in incorrect management decisions. The following table itemizes the section number in which the answers to each question posed in this chapter can be found:

Section Decision
8-1 What is the basic method for calculating overhead?
8-2 How does activity-based costing work?
8-3 How should I use activity-based costing?
8-4 Are there any problems with activity-based costing?
8-5 How do just-in-time systems impact cost allocation?
8-6 How does overhead allocation impact automated production systems?
8-7 How does overhead allocation impact low-volume products?
8-8 How does overhead allocation impact low-profit products?
8-9 How do I allocate joint and byproduct costs?

8-1 WHAT IS THE BASIC METHOD FOR CALCULATING OVERHEAD?

There are two factors that go into the production of the overhead number. One is the compilation of the overhead pool, which yields the grand total of all overhead costs that will subsequently be allocated to each product. The ...

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