Posts Tagged ‘Cause and Effect’


Three Cost Allocation Myths

Cost allocation is used in all sorts of business and government enterprises to distribute the money the entity spends to those that “deserve it”. For some, this means that cost incurred by one department should be spread between other departments that benefited from the expense. For others, this means that cost must be distributed to […]

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Fake Cost Drivers for Administrative Overhead

A recent discussion in an online cost modeling forum related to “Which cost drivers can you use to assign administration overheads to a wide product range in a manufacturing concern.” As the discussion evolved, one response said “it is best done through the driver of turnover of the product produced. … because the efforts of […]

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Financial Reporting versus Costing: Which is Right?

When attempting to calculate the cost of products and services, people often cite practices used for external financial reporting. Then they attempt to use these practices for internal decision making. Perhaps in an ideal world, this may be a valid path. However, we live in a world far from this ideal. In our world, external […]

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Hidden Money in Your Business Part 4: Customer Value versus Customer Cost

In this series of posts, I have discussed powerful questions to find cost reduction or cost optimization opportunities at an activity and business process level. Then I went on to explore cost reduction opportunities in product overhead. But I have saved the best for last.

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Hidden Money in Your Business Part 3: Overhead Cost Reduction Opportunities

In my last two posts, I discussed powerful questions to find cost reduction or cost optimization opportunities at an activity and business process level. These questions focus attention on Cost Drivers, the reasons why we do work and get current results. However, these questions are only one portion of the whole picture. They focus on […]

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Simple Rules for Cost Allocation

Invariably, when the subject of costing comes up, the discussion evolves to a discussion of possible allocation bases, or ways that cost can be distributed to products. However, this polite discussion often degenerates into arguments (could we say battles) over who’s doing what to whom with product cost.

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Back to Overhead Allocation?

Back in college cost accounting, a major project entailed creating a manufacturing organization with at least three products. Life was simple then. I created the required products complete with standards for selling price, material cost, labor cost, and volumes for sales and production. You cannot manufacture without overhead, so I created a couple of overhead […]

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The Problem With Absorption Costing

In a recent forum, a member posted the following question: “Absorption Costing may not be the best approach for product costing. For example, why isn’t a cost of capital or return on assets incorporated into costing rates?”

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