Cost Allocation for Decision Making

Introduction The purpose of this paper is to answer a few important questions: Why do companies allocate costs? How do companies allocate costs? And how this cost allocation can affect the decision making of the company. It is important for the companies to find the proper method to allocate the costs. Cost allocation is an important issue in many companies because many of the costs associated with designing, producing and distributing products and services are not easily identified with the products and services that are created. It would have been easier for companies to allocate cost if costs were directly traceable with the products and the cost allocation would have been minor issue for the company. The decision-making process, is heavily relied on the information the company has received from the cost allocation process. By having all the correct information available, decision-making becomes an easier task and having the incorrect information can be affect the company for months or even years. But first let’s talk about cost accounting, cost allocation and it’s purpose. Cost/ Managerial accounting Managerial accounting is concerned with providing information to managers, this information is for those who are inside the organization and who direct and control its operations(Managerial Accounting and Managerial Accounting Practices). Managerial accounting can be contrasted with financial accounting, which is concerned with providing information to stockholders, creditors and others who are outside an organization. Managerial accounting includes things like budgeting, information on the cost of a companies goods or services and performance reports. These reports provide information on how well the company is proforming by comparing actuals to budgets and/or benchmarks. Other analytical reports are perpared to investigate specific problems such as a decline in profitability of a product ( Ray H. Garrison, Eric W. Noreen and Peter C. Brewer p