Borders Group Inc.’s Allocation of Common Costs Coursework

Introduction

The organization selected for the allocation of common costs is Borders Group Inc. which is a distribution company with various product lines. However, there are three types of products, and two service departments have been selected for the allocation of some overheads costs. The figures are not factual and are meant for this assignment. All the figures used here are assumed to be indirect costs as they relate to service departments. Direct costs, in this case, is that cost that can be directly and easily attributed to revenue-generating operations of the business, and indirect cost is one which arises during the course of operations of the business, but it is very difficult to attribute it specifically to a single unit. So, the whole of the indirect costs from all the units is combined and then allocated a fair portion of this cost to each unit based on some criteria.

Allocation

The cost of each department is assumed to be as follows;

Products

Books (A) 150,000

CDS/DVDS (B)

270,000

Magazines (C)

190,000

Service departments

Transport (X)

30,000

Maintenance (Y)

50,000

690,000

While apportioning these costs to various product lines, cost and management accountants have many methods to use. One of the methods that are used is traditional methods, and they give distorted costs where at times customers may be charged high prices due to over-allocation of the productions costs. They include a method of allocating costs using direct labor, direct machine hours, volume produced, and many other methods. In most instances, they give wrong results, which at times may undervalue or overvalue produced units which may cause the firm to make fewer profits or abnormal profits from some units. It may also, if they overvalue the produced product, cause customers to shy away from the company. Therefore, the method used in the apportionment of overhead used should be accurate in order to give the good firm profitability at the same time maintain the customers by charging them the right price. However, in this case, apportioning these costs to various products, service department costs have been apportioned using the following criteria.

Departments

A B C X Y

X 40% 20% 30% – 10%

Y 50% 20% 20% 10% –

Therefore, the apportionment will be done as follows;

The principle involved in this method is that the appropriate portion of the overhead of one service department is charged to the other service department. For example, 10% of the overhead of the ‘X’ department is charged to the Y department and so on. This process is continued until all the amounts are transferred to production departments. The amounts are rounded to nearest The final overheads of product lines are equal to the total of overheads i.e.$ 190,909 +$ 287,778 + $211,313 = $690,000 dollars.

Conclusion

The choice of one particular overhead rate against the others may substantially affect the number of overhead costs apportioned to a product. Consequently, variations in full-product costs may result simply from the manner in which the overhead rate is selected. The rate used depends on the particular circumstances facing the firm.

References

1. Atril, P.F. and McLaney, E. J. (2002). Management accounting for non-specialists, 3^rd edn (Financial Times Prentice Hall).
2. Drury C; (2000); Management and cost Accounting; 5^th edition, business press Thomson Learning,
3. Horngren, C. T., Bhiman A., foster G., and Datar, S. M. (1999). Management and cost accounting (prentice Hall Europe).