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Principles of Accounting SLP 3: Allocation of Fixed Costs - Essay Example

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The allocation and distribution of fixed and variable costs over the various elements of an organization’s balance sheet are what cost accounting is most concerned about, it would seem…
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Principles of Accounting SLP 3: Allocation of Fixed Costs
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The development of cost and profit centers is based upon this concept, that each department or unit is responsible for its own revenues, costs and profit or loss. In this assignment I will concentrate on the treatment of allocated costs at Apple Inc., my chosen SLP organization. Treatment of Allocated Costs at Apple, Inc. One of the most commonly repeated precepts of cost accounting is that costs and expenses must be allocated to the departments or units where they are consumed. Usually a rational basis for the allocation, such as floor space consumed, units produced, hours worked etc. are used. It depends on the industry and the nature of the cost being allocated. When fixed costs are allocated to a batch or a number or units, they spread the cost over all the units equally and as a result the fixed cost per unit is minimized. On the other hand, variable costs usually remain constant per unit depending on a specific range of volumes. This is all part of cost-volume-profit analysis (Williams et al, 2011; Atkinson et al, 2000). Taking a look at Apple’s Consolidated Income Statement for the period ended September 24, 2011 we can see the following items (Apple Inc. Website, 2012). Net Sales $108.249 billion Cost of Sales $ 64.431billion Gross Margin $ 43.818 billion Operating Expenses: Research & Development Expenses $ 2.429 billion Selling, General & Administrative Expenses $ 7.599 billion Total Operating Expenses $10.028 billion Operating Income $33.790 billion Recasting a Report with Allocated Costs If these costs were allocated on a regional basis, say to America, Europe, Japan and Asia-Pacific respectively (based upon sales percentages of 35.4 percent, 25.66 percent, 6.02 percent and 20.87 percent- these adding up to 87.95 percent with the rest classified as Retail Sales), we would end up with the following allocated costs: Item America Europe Japan Asia-Pacific R & D Expenses $ 859.87m 623.28m 146.23m 506.93m Selling, Gen & Admin Expenses $2690.05m 1949.90m 457.46m 1585.91m Comments on this Report The report with the allocated costs, albeit on the basis of sales percentages, gives added meaning to the overall figures and shows the makeup of Apple’s net sales and operating expenses on a more realistic basis. This can lead to further insights on where to better market Apple’s products, what sort of promotion, sales and advertising efforts are likely to bring better results, what segments of the desired regional market to target and how- so on and so forth (Heitger & Matulich, 1985). It will also dictate whether a cost pull or demand push strategy would be more effective in a given region, based upon previous results and feedback. The allocated figures would thus form a basis for all these decisions (Khan & Jain, 2006). Although the figures for actual operational results have been reported separately on a regional basis in Apple’s consolidated 10-K statement for 2011, doing this exercise was a useful way of estimating the way to allocate common costs and expenses such as R&D and other general, selling and administrative expenses in large corporations such as this one (Besley & Brigham, 2000). In fact making forecasts of sales and expenses based upon a given sales growth rate is a common practice with financial analysts and corporate finance managers. They could use this in what-if scenarios and decide what would be the most likely outcome given industry and firm conditions and if they would be meeting their financial targets that way (Horngren et al, 2011). Competitor actions and other changes in the legal, political and economic landscape can also have an impact on actual results and bring about changes in expectations and future plans Read More
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