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Some managers believe that allocated costs are arbitrary and therefore not relevant, and that only costs...

Some managers believe that allocated costs are arbitrary and therefore not relevant, and that only costs that are direct costs should be reported. Explain why you believe all costs are relevant and why allocation of costs is necessary for accurate financial reporting.

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Answer #1

All costs are relevant and allocation of cost is necessary due to following reasons

  • · Allocation of costs helps in understanding full cost of the product
  • · It helps in accurate product costing
  • · It helps in Cost management through cost control and cost reduction
  • · It helps in setting selling price for the product
  • · It helps in Finished goods valuation for external financial reporting
  • · It helps in various decisions making like make vs. buy, special order acceptance, continuance or discontinuance of product line or division.
  • · It helps in CVP analysis and understanding profitability at different levels of production.
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