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One of these topics is the concept of cost allocation. This aspect is important because it plays a part in determining the final cost of the company's product at which it will be sold.
The various costs that go into making the product can be divided into -
The costs that can exactly be attributed a particular product made by the company are called direct costs.
These are the general costs that are required to run the regular operations of the company and cannot be attributed to a particular product.
The direct costs are clearly defined for a particular product. The amount of direct costs associated with a product can be easily calculated. But it is not so for indirect costs because these costs are needed to produce all the goods and run the general administration of the company. So when costs are calculated the indirect costs are distributed among all the products. However it is not distributed equally but according to a percentage. This process of determining the percentage of indirect costs that a product shares is called cost allocation. The percentage is calculated on the basis of the contribution of that particular product in the whole production. These costs are allocated in such a way that they ultimately sum up equally in the financial statement.
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Apart from the key components of Performance Metrics other topics like -
These all are covered comprehensively by our lessons. You can even get free accounting homework help from our teachers.