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¶ … company major businesses operates. One business manufactures sells unicycles commercial circuses (total sales $150M), sells bicycles public (total sales $20M). The unicycle business occupies 75,000 square feet manufacturing warehouse, bicycle business occupies remaining 25,000 square feet.
Business scenario
Unicycle and bicycle manufacturing
Advertising and warehousing costs
The totality of the advertising and warehousing costs -- M -- were divided equally between the two businesses. Specifically, this means that advertising costs were of 0.5 M. For the unicycle business and 0.5 M. For the bicycle business. Similarly, in a context in which the total warehouse costs were of M, and they were equally divided between the two businesses, it is stated that 0.5 M. were the warehousing costs for the unicycle business and 0.5 M. were the warehousing costs for the bicycle business.
Recommendations for cost allocation
Aside from the traditional manner of dividing the total costs equally and allocating them to the two business activities, there are two other possibilities of allocating the costs -- based on the space occupied in the facility, and based on the level of sales. The warehousing costs would be...
Specifically, warehousing costs would be allocated as follows: 0.75 M. For the unicycle business and 0.25 M. For the bicycle business. In terms of the advertising costs, these would be allocated in a larger proportion to the bicycle business, as this is more commercial and requires more publicity, than the unicycle business, which ensures distribution through specific and niche segments.
3. Cost allocation issues
The adequate allocation of the costs to the two business operations is necessary in order to avoid and address several issues, including the following:
Resource necessities
Profitability computations
Future growth projections
Investment necessities
Expected outcome and so on.
Part 2: Job order costing system vs. process type costing system
1. Compare and contrast
Job order costing refers to the allocation of costs to each job encountered in the production process (Business Dictionary). The process type costing system on the other hand collects all costs and equally divides them per units of produced items (Bradford, 2008). Job order costing is as such focused on the unit costs of a…
References:
Bradford, T., 2008, Process costing, Accounting, http://www.suite101.com/content/process-costing-a52142 last accessed on July 26, 2011
Nure, R., Accounting 131, College of San Mateo, http://www.smccd.net/accounts/nurre/online/chtr3.htm last accessed on July 26, 2011
Vitez, O., 2011, The advantages of process costing, Small Business, http://smallbusiness.chron.com/advantages-process-costing-4065.html last accessed on July 26, 2011
Job order system, Business Dictionary, http://www.businessdictionary.com/definition/job-order-system.html last accessed on July 26, 2011
Job order costing system, Accounting for Management, http://www.accountingformanagement.com/job_order_costing.htm last accessed on July 26, 2011
Process costing, Accounting Tutorial, Middle City, http://www.middlecity.com/ch18.shtml last accessed on July 26, 2011
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