For costs that cannot be traced, what tests should a cost allocation basis (not the cost allocation method) meet before that cost allocation basis (direct labor hours, machine hours, direct labor cost, etc.) can be used to allocate costs in the organization? In other words, what are the criteria that make a certain measurement or basis used to perform cost allocation a good one to use? Be sure to indicate as well whether your recommendations are universally applicable or situation-specific. Please note that this question is not asking about the choice of allocation method (e.g. direct method, step/sequential method, or reciprocal/algebraic method) of cost allocation. Rather, the question is asking about the choice of basis (direct labor hours, direct labor costs, machine hours, number of units shipped, number of machine setups, etc.) to be used as a gauge or measure of how much corresponding cost to assign. The question is asking about what must one take into consideration to be sure they have selected the best basis upon which to allocate cost. It is asking about what factors make a good cost allocation basis a good one to use for allocating a cost. (To help clarify the concept assume you went to a restaurant with two other friends and all three of you ordered a jumbo pizza together. You could decide to allocate the total cost of the pizza in portions to each of the three dining individuals on the basis of age, shoe size, ACT/SAT scores, IQ scores, t-shirt size, body weight, number of academic degrees held grade point average, or some other basis. What would need to be taken into account when coming up with a high-quality choice of cost allocation basis to spread the total cost of the pizza in an appropriate manner across the three dining people participating in the consumption of the pizza. Now, think about what would need to be taken into account when allocating a cost in a real-world organization and what would need to be considered when choosing a good cost allocation basis with which to allocate that cost.) There are some general considerations that should be taken into account when selecting a cost allocation basis. 

Required: This question is asking you to identify those general considerations, which are applicable to almost any cost allocation situation and the related choice of allocation basis.

Answer rating: 100% (QA)

What is Cost Allocation Cost allocation is the process of identifying accumulating and assigning costs to costs objects such as departments products programs or a branch of a company It involves ident... View the full answer