Accounting Business Reporting for Decision Making

CHAPTER 11 Costing and pricing in an entity 473

Accounting system indirect costs

Accounting system

Various cost categories

Finance Personnel

Computer

services

Home

insurance

Car

insurance

Life

insurance

General

administration

Rent Electricity

Costs allocated

Costs traced

F I G U R E 11.6 First stage cost allocation — relationship between costs and cost objects

After analysis of the accounting records, the following indirect costs were identified, and a suitable

resource driver (allocation base) was selected.

Indirect cost category Cost Resource driver

Rent

Electricity

General administration

$ 200 000

199 500

300 000

Metres floor space

Kilowatt hours

Number of employees

Total $ 699 500

Therefore, to calculate the full cost of each department, the indirect costs (rent, electricity, and general

administration) need to be allocated to each department (both service and operating). To assist with the

allocation, the accounting staff have undertaken a study to identify the most appropriate resource driver

and have measured the total usage of the resource driver. The resource driver selected and the use of

the resource driver by each department are shown below.