Cost allocation is a process of attributing cost to particular cost centers. For example the wage of the driver of the purchasing department can be allocated to the purchasing department cost center. It is not necessary to share the wage cost over several different cost centers. Cost and services are not identical to each other.
Cost allocation is the assigning of a common cost to several cost objects. For example, a company might allocate or assign the cost of an expensive computer system to the three main areas of the company that use the system. A company with only one electric meter might allocate the electricity bill to several departments in the company.
Allocation implies that the assigning of the cost is somewhat arbitrary. Some people describe the allocation as the spreading of cost, because of the arbitrary nature of the allocation. Efforts have been made over the years to improve the bases for allocation. In manufacturing, the overhead allocations have moved from plant-wide rates to departmental rates, from direct labor hours to machine hours to activity based costing. The goal is to allocate or assign the costs based on the root causes of the common costs instead of merely spreading the costs...
Aug 10, 2011
IT cost transparency
IT cost transparency is a new category of information technology management software and systems and that enables enterprise IT organizations to model and track the total cost to deliver and maintain the IT Services they provide to the business. It is increasingly a task of management accounting. IT cost transparency solutions integrate financial information such as labor, software licensing costs, hardware acquisition and depreciation, data center facilities charges, from general ledger systems and combines that with operational data from ticketing, monitoring, asset management, and project portfolio management systems to provide a single, integrated view of IT costs by service, department, GL line item and project. In addition to tracking cost elements, IT Cost Transparency tracks utilization, usage and operational performance metrics in order to provide a measure of value or ROI. Costs, budgets, performance metrics and changes to data points are tracked over time to identify trends and the impact of changes to underlying cost drivers in order to help managers address the key drivers in escalating IT costs and improve planning.
IT cost transparency combines elements of activity based costing, business intelligence, operational monitoring and performance dashboards. It provides the system on which to implement ITIL v3 Financial Management guidelines to assist with Financial Management for IT services and is closely related to IT Service Management.
IT cost transparency combines elements of activity based costing, business intelligence, operational monitoring and performance dashboards. It provides the system on which to implement ITIL v3 Financial Management guidelines to assist with Financial Management for IT services and is closely related to IT Service Management.
Life cycle cost analysis
Life cycle cost analysis may refer to:
Life cycle assessment, the investigation and valuation of the environmental impacts of a given product or service caused or necessitated by its existence
Whole-life cost, the total cost of ownership over the life of an asset, also commonly referred to as "cradle to grave" or "womb to tomb"
Life cycle assessment, the investigation and valuation of the environmental impacts of a given product or service caused or necessitated by its existence
Whole-life cost, the total cost of ownership over the life of an asset, also commonly referred to as "cradle to grave" or "womb to tomb"
Break down
Costs and Sales can be broken down, which provide further insight into operations.
Decomposing Total Costs as Fixed Costs plus Variable Costs.
One can decompose Total Costs as Fixed Costs plus Variable Costs:
\text{TC} = \text{TFC} + \text{V} \times \text{X}
Decomposing Sales as Contribution plus Variable Costs.
Following a matching principle of matching a portion of sales against variable costs, one can decompose Sales as Contribution plus Variable Costs, where contribution is "what's left after deducting variable costs". One can think of contribution as "the marginal contribution of a unit to the profit", or "contribution towards offsetting fixed costs".
In symbols:
\begin{align} \text{TR} &= \text{P} \times \text{X}\\ &= \bigl(\left(\text{P} - \text{V} \right)+\text{V}\bigr)\times \text{X}\\ &= \left(\text{C}+\text{V}\right)\times \text{X}\\ &= \text{C}\times\text{X} + \text{V}\times \text{X} \end{align}
where
C = Unit Contribution (Margin)
Profit and Loss as Contribution minus Fixed Costs.
Subtracting Variable Costs from both Costs and Sales yields the simplified diagram and equation for Profit and Loss.
In symbols:
\begin{align} \text{PL} &= \text{TR} - \text{TC}\\ &= \left(\text{C}+\text{V}\right)\times \text{X} - \left(\text{TFC} + \text{V} \times \text{X}\right)\\ &= \text{C} \times \text{X} - \text{TFC} \end{align}
Diagram relating all quantities in CVP.
These diagrams can be related by a rather busy diagram, which demonstrates how if one subtracts Variable Costs, the Sales and Total Costs lines shift down to become the Contribution and Fixed Costs lines. Note that the Profit and Loss for any given number of unit sales is the same, and in particular the break-even point is the same, whether one computes by Sales = Total Costs or as Contribution = Fixed Costs. Mathematically, the contribution graph is obtained from the sales graph by a shear, to be precise \left(\begin{smallmatrix}1 & 0\\ -V & 1\end{smallmatrix}\right), where V are Unit Variable Costs.
Decomposing Total Costs as Fixed Costs plus Variable Costs.
One can decompose Total Costs as Fixed Costs plus Variable Costs:
\text{TC} = \text{TFC} + \text{V} \times \text{X}
Decomposing Sales as Contribution plus Variable Costs.
Following a matching principle of matching a portion of sales against variable costs, one can decompose Sales as Contribution plus Variable Costs, where contribution is "what's left after deducting variable costs". One can think of contribution as "the marginal contribution of a unit to the profit", or "contribution towards offsetting fixed costs".
In symbols:
\begin{align} \text{TR} &= \text{P} \times \text{X}\\ &= \bigl(\left(\text{P} - \text{V} \right)+\text{V}\bigr)\times \text{X}\\ &= \left(\text{C}+\text{V}\right)\times \text{X}\\ &= \text{C}\times\text{X} + \text{V}\times \text{X} \end{align}
where
C = Unit Contribution (Margin)
Profit and Loss as Contribution minus Fixed Costs.
Subtracting Variable Costs from both Costs and Sales yields the simplified diagram and equation for Profit and Loss.
In symbols:
\begin{align} \text{PL} &= \text{TR} - \text{TC}\\ &= \left(\text{C}+\text{V}\right)\times \text{X} - \left(\text{TFC} + \text{V} \times \text{X}\right)\\ &= \text{C} \times \text{X} - \text{TFC} \end{align}
Diagram relating all quantities in CVP.
These diagrams can be related by a rather busy diagram, which demonstrates how if one subtracts Variable Costs, the Sales and Total Costs lines shift down to become the Contribution and Fixed Costs lines. Note that the Profit and Loss for any given number of unit sales is the same, and in particular the break-even point is the same, whether one computes by Sales = Total Costs or as Contribution = Fixed Costs. Mathematically, the contribution graph is obtained from the sales graph by a shear, to be precise \left(\begin{smallmatrix}1 & 0\\ -V & 1\end{smallmatrix}\right), where V are Unit Variable Costs.
Basic graph
The assumptions of the CVP model yield the following linear equations for total costs and total revenue (sales):
\text{Total Costs} = \text{Fixed Costs} + (\text{Unit Variable Cost} \times \text{Number of Units})
\text{Total Revenue} = \text{Sales Price} \times \text{Number of Units}
These are linear because of the assumptions of constant costs and prices, and there is no distinction between Units Produced and Units Sold, as these are assumed to be equal. Note that when such a chart is drawn, the linear CVP model is assumed, often implicitly.
In symbols:
\text{TC} = \text{TFC} + \text{V} \times \text{X}
\text{TR} = \text{P} \times \text{X}
where
TC = Total Costs
TFC = Total Fixed Costs
V = Unit Variable Cost (Variable Cost per Unit)
X = Number of Units
TR = S = Total Revenue = Sales
P = (Unit) Sales Price
Profit is computed as TR-TC; it is a profit if positive, a loss if negative.
\text{Total Costs} = \text{Fixed Costs} + (\text{Unit Variable Cost} \times \text{Number of Units})
\text{Total Revenue} = \text{Sales Price} \times \text{Number of Units}
These are linear because of the assumptions of constant costs and prices, and there is no distinction between Units Produced and Units Sold, as these are assumed to be equal. Note that when such a chart is drawn, the linear CVP model is assumed, often implicitly.
In symbols:
\text{TC} = \text{TFC} + \text{V} \times \text{X}
\text{TR} = \text{P} \times \text{X}
where
TC = Total Costs
TFC = Total Fixed Costs
V = Unit Variable Cost (Variable Cost per Unit)
X = Number of Units
TR = S = Total Revenue = Sales
P = (Unit) Sales Price
Profit is computed as TR-TC; it is a profit if positive, a loss if negative.
Assumptions
CVP assumes the following:
Constant sales price;
Constant variable cost per unit;
Constant total fixed cost;
Constant sales mix;
Units sold equal units produced.
These are simplifying, largely linearizing assumptions, which are often implicitly assumed in elementary discussions of costs and profits. In more advanced treatments and practice, costs and revenue are nonlinear and the analysis is more complicated, but the intuition afforded by linear CVP remains basic and useful.
One of the main Methods of calculating CVP is Profit volume ratio: which is (contribution /sales)*100 = this gives us profit volume ratio.
contribution stands for Sales minus variable costs.
Therefore it gives us the profit added per unit of variable costs.
Constant sales price;
Constant variable cost per unit;
Constant total fixed cost;
Constant sales mix;
Units sold equal units produced.
These are simplifying, largely linearizing assumptions, which are often implicitly assumed in elementary discussions of costs and profits. In more advanced treatments and practice, costs and revenue are nonlinear and the analysis is more complicated, but the intuition afforded by linear CVP remains basic and useful.
One of the main Methods of calculating CVP is Profit volume ratio: which is (contribution /sales)*100 = this gives us profit volume ratio.
contribution stands for Sales minus variable costs.
Therefore it gives us the profit added per unit of variable costs.
Cost-Volume-Profit Analysis
Cost-Volume-profit (CVP), in managerial economics is a form of cost accounting. It is a simplified model, useful for elementary instruction and for short-run decisions.
Cost-volume-profit (CVP) analysis expands the use of information provided by breakeven analysis. A critical part of CVP analysis is the point where total revenues equal total costs (both fixed and variable costs). At this breakeven point (BEP), a company will experience no income or loss. This BEP can be an initial examination that precedes more detailed CVP analysis.
Cost-volume-profit analysis employs the same basic assumptions as in breakeven analysis. The assumptions underlying CVP analysis are:
The behavior of both costs and revenues is linear throughout the relevant range of activity. (This assumption precludes the concept of volume discounts on either purchased materials or sales.) Costs can be classified accurately as either fixed or variable. Changes in activity are the only factors that affect costs. All units produced are sold (there is no ending finished goods inventory). When a company sells more than one type of product, the sales mix (the ratio of each product to total sales) will remain constant.
The components of Cost-Volume-Profit Analysis are:
Level or volume of activity
Unit Selling Prices
Variable cost per unit
Total fixed costs
Sales mix
Cost-volume-profit (CVP) analysis expands the use of information provided by breakeven analysis. A critical part of CVP analysis is the point where total revenues equal total costs (both fixed and variable costs). At this breakeven point (BEP), a company will experience no income or loss. This BEP can be an initial examination that precedes more detailed CVP analysis.
Cost-volume-profit analysis employs the same basic assumptions as in breakeven analysis. The assumptions underlying CVP analysis are:
The behavior of both costs and revenues is linear throughout the relevant range of activity. (This assumption precludes the concept of volume discounts on either purchased materials or sales.) Costs can be classified accurately as either fixed or variable. Changes in activity are the only factors that affect costs. All units produced are sold (there is no ending finished goods inventory). When a company sells more than one type of product, the sales mix (the ratio of each product to total sales) will remain constant.
The components of Cost-Volume-Profit Analysis are:
Level or volume of activity
Unit Selling Prices
Variable cost per unit
Total fixed costs
Sales mix
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