Organization's allocation of common costs to divisions and products

Treatment of Costs Allocation for CISCO

CISCO is an organization that designs, manufactures, and sells Internet Protocols (IP)-based networking. To satisfy the customer needs, CISCO also designs custom products tailored to the customer's specifications to assist them in reducing costs, improve productivity and gaining competitive advantages. Since CISCO designs and manufactures wide range of products, the company is required to allocate costs to its products and services to improve decision and resources allocation.

The objective of this report is to retrieve how CISCO allocates common costs for its product, and services.

Method CISCO allocated costs for Products and Services

Cost allocation is defined as the costs allocated to goods and services to measure the inventory costs. Since CISCO provides wide range of products and services, the cost allocation is very critical to identify the costs associated to each product in order to calculate the associated revenue. At the end of the fiscal year 2010, the total costs for the production of goods and services were $14,397 millions. However, total costs allocated for all company products was $11,620 millions, while the total costs allocated to all services was $2,777 million. The method CISCO employed to allocate cost is by using the Reciprocal Allocation Method.

Reciprocal Allocation Method (RM) Used by CISCO

Method CISCO uses to allocate costs to its products and services are by using the Reciprocal Allocation Method. The Reciprocal Allocation Method is the process of recognizing that service department and the production departments provide service to one another. (Horngren, Sundem, & Stratton 2010). Cisco uses this method for the cost allocation because it is assumed theoretically accurate, and it enables the company to allocate costs interdepartmentally. The calculation CISCO uses to allocate costs for its goods and services using Reciprocal Allocation Method is as follows:

D.P. = $240,000 + (0.24 x H.R.)

The simultaneous equation is solved to determine the costs allocated to the service department and the production department (DP).

R.M. = $80,000 + (0.10 x H.R.) + (0.14 x D.P.)

With the calculation of the simultaneous equation, the results of the three variables are as follows:

H.R. = $182,114

D.P. = $276,422

R.M. = $117,562

Thus, CISCO allocated costs are as follows:

H.R.

D.P.

R.M.

Machining

Assembly

Costs prior to allocation

$160,000

$240,000

$80,000

Allocation of H.R.

($182,114)

36,422

36,224

$72,846

$54,634

Allocation of D.P.

22,114

(276,422)

19,350

82,926

152,032

Allocation of R.M.

(117,562)

58,780

58,780

$214,552

$235,446

From the table, the derivation of the amount is that the total amount of $72,846 is allocated to Human Resources as well as Machining. The cost allocation to Human Resources is 40% of cost allocation to machine, and this is the total cost of $91,057. Unallocated costs are the costs that cannot be attributed directly to the company goods and services. For example, the price of supplies is an example of unallocated costs. It is very difficult to allocate the unallocated costs directly the goods and services. The only method that CISCO uses to treat unallocated costs is to spread it evenly among all departments. By arriving at the allocated costs for CISCO, this report provides several benefits.