Question

explain why some production costs must be assigned to products through an allocation process?

PLEASE BE VERY DETAILED :)

Answer 1

Some production costs must be assigned to products through an allocation process because it can sometimes be difficult to trace these costs to a specific product. If there are specific costs earmarked towards a product, then they have to be allocated to that product. If these costs are not allocated properly, they could fall in the overhead costs and could then have an effect on the company’s bottom line. There are different types of allocation bases that companies need to consider and determine which method is best for them (step-down and direct method). The following are reasons companies use cost allocation:

(1) such as determining product profitability;

(2) predicting how economic constraints effect planning;

(3) valuing inventory;

(4) obtaining a fair pricing throughcompetitive bids;

(5) assisting management with making decisions.

Examples:Some production costs such as a factory manager's salary cannot be traced to a particular
product or job, but rather are incurred as a result
of overall production activities. In addition, some
production costs such as indirect materials cannot
be easily traced to jobs. If these costs are to be
assigned to products, they must be allocated to
the products.