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Recent Developments in the Field of Physics

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Cost Allocation Example

Cost Allocation Example
Overhead rate: 1/20 = 0.05







Consider a family that does nothing else than eating toast
$0.3 per toast (direct cost)
Utility bill: $1
What is the allocation base?
What is the overhead rate?
Number of
Toasts
Adam

9

2.7

0.05

0.45

3.15

7

2.1

0.05

0.35

2.45

Connie

4

1.2

0.05

0.20

1.4

What happens if the utility bill increases because now the family not only eats toast but watches TV

7

Connie

Overhead Overhead Total rate cost

Beatrix

Overhead

Direct toast cost

Adam

9

Beatrix

Overhead rate Number of
Toasts

4

Utility bill increases to $50
1

Assume the family does not watch TV together…

Cost Allocation Example

2

Cost Allocation Example

• Assume we still use toast as cost driver
•  No additional cost pool
• New overhead rate: 50/20 = 2.5

• Lets see….

Number of
Toasts

Direct toast cost

Adam

9

2.7

2.5

22.5

7

2.1

2.5

17.5

Connie

4

1.2

2.5

10

6

7

4⅔

Connie

11.2

9

Beatrix

19.6

Number of
TV hours

Adam

25.2

Beatix

Number of toasts 4

2⅔

Overhead Overhead Total rate cost

• We know that $49 of the utility bill are due to the TV

• Can we improve the accuracy of our cost system?
3

4

1

Cost Allocation Example

Cost Allocation Example

• 2 Cost Pool Allocation Scheme
• Total TV hours: 13 ⅓
• Overhead rate: 49/ 13 ⅓ = 3.675
Number
of
Toasts

Direct toast cost

Adam

9

Beatrix
Connie

• Comparing total costs
Total cost
(two cost pools)

Overhead
(Toast)

TV hours Overhead
(TV)

Total cost 2.7

0.05

0.45

6

22.05

2.1

0.05

0.35

4⅔

17.15

19.6

4

1.2

0.05

0.20

2⅔

9.8

11.2

25.2

19.6

19.6
11.2

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