Question

According to the Chapter 7 in our textbook, allocating costs among the different costs objects can give management a great deal of flexibility as to how allocation is done. There are times when management allocates costs where more cost is assigned to a particular support department or product than another way of allocating costs. Is this type of cost allocation ethical?

Answer 1

Cost allocation is the process of identifying, aggregating, and assigning costs to cost objects. Cost object is any activity or item for which you want to seperately measure cost. For example cost objects are a product, a research project, a customer, a sales region, and a department.

Different entity undertakes different methods to allocate cost to a cost object. The basis that can be taken for allocating cost to cost objects such as square footage, headcount, cost of assets emplyoed, etc. The goal of whichever cost allocation method used is to either spread the cost in the fairest way possible, or to do so in a way that impacts the behaviour petterns of the cost object.  

Management may assign or allocate different cost to diiferent support departments or product based on their basis on which the costs are assigned. Therefore, it will be an ethical cost allocation type if a management allocate more cost to a particular support department or product than the other departments because the costs are allocated to the cost object based on certain basis and which can be more or less in amount in different cost objects.

Example: The African Bongo Corporation (ABC) runs its own electrical power station in the hinterlends of South Africa, and allocatesthe cost of the power station to its six operating departments based on their electricity usage level.

Therefore, it can be concluded that it will be an ethical cost allocation type if manegement allocate more cost to a particular support department or product than other departments.