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∉ Distribution and Assessment Cycles

Distribution and assessment cycles are key concepts in secondary cost accounting, particularly for allocating overhead costs to products or services. These cycles refer to the periodic process of determining and assigning overhead costs to cost objects.

Distribution Cycle

The distribution cycle involves the following steps:

  1. Identification of Overhead Costs: This step involves identifying all indirect costs that cannot be directly traced to specific products or services. These costs might include rent, utilities, salaries of support staff, and depreciation of factory equipment.
  2. Grouping of Overhead Costs: The identified overhead costs are grouped into cost centers or cost pools. This grouping is based on the nature of the costs and their relationship to the production process.
  3. Determination of Allocation Bases: Allocation bases are chosen to distribute the overhead costs to products or services. These bases should be closely related to the consumption of overhead resources by the products or services. Common allocation bases include direct labor hours, machine hours, direct materials cost, or revenue.

Assessment Cycle

The assessment cycle involves the following steps:

  1. Calculation of Allocation Rates: Allocation rates are calculated by dividing the total overhead costs in each cost center by the total allocation base for that center.
  2. Allocation of Overhead Costs: The calculated allocation rates are used to assign overhead costs to individual products or services. This is done by multiplying the allocation rate by the consumption of the allocation base by each product or service.

Example:

  • A manufacturing company has two cost centers: production and administration.
  • The production cost center has total overhead costs of $100,000 and a total of 10,000 direct labor hours.
  • The allocation rate for the production cost center is $10 per direct labor hour ($100,000 / 10,000).
  • If a product requires 50 direct labor hours, its overhead cost allocation would be $500 (50 hours * $10 per hour).

Key Points:

  • The distribution and assessment cycles are typically performed periodically, such as monthly, quarterly, or annually.
  • The choice of allocation bases is crucial for accurate cost allocation.
  • The goal of these cycles is to provide a more comprehensive view of product or service costs by including overhead costs.
  • Effective distribution and assessment cycles can help businesses make better pricing, production, and resource allocation decisions.

 




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