Allocation of Fixed Costs Essay Example | Topics and Well Written Essays - 750 words

Allocation of Fixed Costs - Essay ExampleBut in recent environment where the overheads such as IT personify became a major portion in increase appeal. In advanced manufacturing technology overheads atomic number 18 likely to be more important and therefore it is problematic to justify the IT cost on the basis of absorption cost methodology. The problem arises when the company is not commensurate to decide that on which basis the IT cost should allocate into company products. There are many distinguishable techniques can be single-valued functiond for allocation of IT costs. Some of them are mentioned below According to many lucky financial advisors, the use of Activity Based Costing (ABC) methodology can be a scoop and beneficial technique for the allocation of IT costs. In addition, it is also proved by accounting practices of past hardly a(prenominal) decades that activity found costing is absolutely a outgo technique for charging allocating the major complex overheads costs like IT costs. Activity based costing is just one method of charging IT costs because it focuses on the recognition of actual IT costs and can give the true and accurate results. A simple charge thorn costing technique can be also a good option for allocation of IT cost but it is only feasible only at first stage and the company can pillowcase many of big inherent problems at the end of process. Why Activity Based Costing (ABC) is best technique for the allocation of IT costs ABC Vs Flat Rate In comparison with other costing methodologies the Activity based costing technique always gives accurate results and could be a true heartbeat of profitability. For example, Allocation of overheads on flat rate system hides the inefficiencies of the systems and causes many serious problems in long run. using a flat rate is can be the best option to get cost transparence but sometimes it can be headache for business leaders because they started to thin k that, they are charged grea ter than the their use. Using flat rate system, there is a possibility of greater charges in respect with little use of service. Complexity of IT costs On the other side of coin, other conventional approaches are not able to measure the complexity of the IT costs properly while the Activity based costing recognize the complexity with its multiple cost drivers. Realistic Approach In modern militant environment, companies must be able to assess profitability realistically. Activity based costing methodology facilitates a good understanding of what drives IT costs. Purpose of Allocation Simple the cost allocation is the process of charging the indirect costs in to products on the base of services they consume. It is a process of charging the portion of shared services from cost centers in to a product or service. In current technological environment, the overheads are likely to be far more important and in fact direct labour may account for as little 5% of a product cost. In advance e nvironment many non-volume related delay activities such as IT costs have captured a great part in companys profitability thats why the fair allocation of IT costs is more important to measure the true profitability level. Benefits of Allocation There are many benefits of allocation of IT costs. Some of them are mentioned below graceful Accountability of resources In current competitive trends, enterprises demand more accountability of their funds and they try to use their resources in effective manner. For this purpose, Proper allocation of IT