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Essay / Research Paper Abstract
This 4 page paper looks at the different ways that costs may be accounted for and the way that the allocation of uncontrollable overheads may impact on the results of different divisions or departments. The paper presents a fictitious example and discusses the issues with the different approaches. The bibliography cites 5 sources.
Page Count:
3 pages (~225 words per page)
File: TS14_TEallcost.rtf
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Unformatted sample text from the term paper:
dependant upon the way that costs are allocated and the contrition margin is used. This can end up distorting the profitability of differing units, it may also lead to poor
decision being made regarding the way business is taken on, depending on the method used to allocate costs (Chadwick, 2001). If an example of a firm that has four
offices, each appears to give a different level of profitability. All are supported by head office staff and an office that does not have and revenues as it has administrative
functions only, this is not unusal for a head office (Elliott and Elliott, 2007). In figure 1 we have four offices that share a head office. The cost
of the head office is given as 100,0001, the offices are producing mixed levels of business for themselves and each have their own overheads. In the example head office has
determined that the best way of allocating coasts is on an equal basis across the four offices. The four offices are given in an example below Figure 1 Allocated overhead
costs Office 1 Office 2 Office 3 Office 4 Total Total revenue 275,000 450,000 750,000 1,200,000 2,675,000 Variable cost of sales 104,500 171,000 285,000 456,000 1,016,500 Contribution margin
170,500 279,000 465,000 744,000 1,658,500 Less fixed overheads (1) 60,000 75,000 150,000 300,000 585,000 Less allocated overhead 250,000 250,000 250,000 250,000 1,000,000 Profit -139,500 -46,000 65,000 194,000 73,500 This
gives the appearance that there are two profitable offices and two offices that are making a loss, this is due to the way that the costs are allocated. In all
cases it is assumed that the cost variable costs are 38% and are the same for each office. The skew can be appreciated when it is realized that the fixed
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