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Indirect costs assigned in production are monitored under overheads costs. However, since indirect costs cannot be directly assigned to products, they are assigned in three basic stages. If a cost is directly assigned to the cost objects, the term direct cost tracing is used. If a cost is distributed indirectly to the cost object, the term cost allocation is used.
Cost allocation is a process of assigning costs to individual products or time periods. Contrast with cost tracing, cost allocations involve the use of a representative rather than direct measures. For example, consider an activity such as receiving incoming materials. Assuming that the cost of receiving materials is strongly influenced by the number of receipts, then costs can be allocated to products (i.e. the cost object) based on the number of material receipts each product requires. The basis that is used to allocate costs to cost objects (i.e. the number of material receipts in our example) is called an allocation base or cost driver. If 20 percent of the total number of receipts for a period were required for a particular product, then 20 percent of the total costs of receiving incoming materials would be allocated to that product. Assuming that the product was discontinued, and not replaced, we would expect action to be taken to reduce the resources required for receiving materials by 20 percent.
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Management accounting is the process of supplying the managers in an organization with relevant information, both financial and nonfinancial, for making decisions, allocating resources, and monitoring, evaluating, and rewarding performance. (…) Nonfinancial management accounting information includes measures related to customer satisfaction and loyalty, process quality and timeliness, and employee motivation. Management accounting information has the following features:
1. Managerial accounting provides both data on past transactions and helps users with information and calculations for the future. For both reporting and planning, management accounting uses both financial and nonfinancial measures.
2. Management accounting has a multifaceted perspective by meeting the needs of decision-making of both employees and senior management.
3. Management accounting, as in financial accounting, does not analyze within the framework of various theoretical rules or legal regulations. All of these get determined by managers’ judgments and decisions about what best meets their needs for actionable information and is defined
entirely by the needs of managers using the information.
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