Management Accounting: Cost Allocation and Cost Pools

This article discusses cost allocation and cost pools in management accounting. It includes solved examples of allocating fixed and variable overheads to different jobs and the allocation of costs to different cost pools based on cost drivers. The subject is Management Accounting and the article covers course code 1. The college or university is not mentioned.

MANAGEMENT ACCOUNTING 1
MANAGEMENT
ACCOUNTING

MANAGEMENT ACCOUNTING 2
Question 2:
a) Estimated allocation rates for fixed and variable overhead for current period
Overeads Estimate
in $ Allocation Basis Unit
Estimated
Allocation
Rates ($)
Base
a b a/b
Variable Overheads 1,50,000 Direct Labour Cost ($) 75,000 2 Per $ of Direct Labour
Fixed Overheads 1,20,000 Direct Labour Hours (Hours) 3,000 40 Per Direct Labour Hour
b) Total overhead cost allocated to Job 20 in October
Direct Labour Cost on Job 20 in October ($) 250
Direct Labour Hours on Job 20 in October (Hours) 10
Allocation of Overheads : $
Variable Overheads @ $ 2 per $ of Direct Labour 500
Fixed Overheads @ $ 40 per Direct Labour Hour 400
900
c) Total Cost of Job 20 $
Account Balance on October 1 3,500
Equipment & Supplies in October 1,000
Direct Labour 250
Variable Overheads 500
Fixed Overheads 400
5,650
d) Amount of Fixed and Variable Overheads allocated to Jobs in October
Direct Labour Cost on all Jobs in October ($) 5725
Direct Labour Hours on all Jobs in October (Hours) 229
Allocation of Overheads : $
Variable Overheads @ $ 2 per $ of Direct Labour 11,450
Fixed Overheads @ $ 40 per Direct Labour Hour 9,160
20,610
e) Two different Cost pools are choosen for allocation of different nature of overheads. Variable Overheads primarily being fringe benefits are generally given to labour with high salary
The method of allocation of Variable cost on the basis of Direct Labour Cost and Fixed cost on the basis of Direct Labour Hours will make a difference in the clients bill where equ
Question 3:

MANAGEMENT ACCOUNTING 3
a) Cost Pools and its Cost $ Remarks
Director & Staff Salaries 60,000 Common Cost for all the 3 facilities
Animal Trainers 20,000 50% cost is common for all the 3 facilities
Food & Supplies 50,000 Common Cost for all the 3 facilities
Building related Cost 2,00,000 Common Cost for all the 3 facilities
3,30,000
Identifiable Costs $ Remarks
Animal Shelter Employees Salaries 1,00,000 Only linked to Housing & Finding Home facility for stray and unwanted animals and therefore
Vet & Technicians 1,50,000 Only linked to Healthcare & Vet Services facility and therefore it does not require allocation
Animal Trainers 20,000 50% of Cost is identifiable with Pet Training Service facility and therefore it does not require
Food & Supplies 75,000 $ 75,000 is identifiable with Vet Service facility and therefore it does not require allocation
3,45,000
b) Cost Drivers for Cost Pool
Cost Pool Cost Driver Explanation
Director & Staff Salaries Daily No. of Animals Housed It does not have direct link to any particular activity and therefore it should be allocated on the
Animal Trainers No. of Classes Trainers are working with all animals and therefore their cost should be allocated on the basis
Food & Supplies No. of animals visited Clinic Food and supplies other than used in Vet services should be allocated on the basis of Animal
Building related Cost Building Area (Square Feet) Building Related cost is directly linked with the area and therefore it should be allocated on the
c) Allocation Rates
Cost Pool $ Cost Driver Unit Allocation Rate / Driver
Director & Staff Salaries 60,000 Daily No. of Animals 75 800.00
Animal Trainers 20,000 No. of Classes 125 160.00
Food & Supplies 50,000 No. of Animals visited Clinic 5,000 10.00
Building related Cost 2,00,000 Building Area (Square Feet) 10,000 20.00
3,30,000
The rate of allocation is the rate at which the pre-determined or the overhead costs are
divided amongst the different products or the services that are being rendered. This rate helps
in the calculation of the cost of each product. In the given case, the same would be the square
footage of the shelter.