INTERNAL ACCOUNTING ENGINEERING
Allocation of Indirect Cost.
1. Indirect Cost transactions.
In Class 2, the Cost Elements class, we have recorded all costs which match this accounting period and correspond to its production volume. All cost elements within Internal Accounting must be allocated. The first step in this procedure is to allocate all Indirect Costs to the various departments.
We begin by allocating all of our indirect costs to the different departments (or cost centers). All costs that are not classified as direct, and that have their origin in our departments, will be indirect.
To give our direct laborer an opportunity to produce a product, we must establish a department with all the necessary costs it will require to operate this department. So we must have in this department an employee who is paid a salary and who will be responsible for the activity within this area. We will also need an indirect laborer who will oversee the operating procedure of this department. Naturally, we also need a space (rent), electricity, insurance, phone and many other indirect costs in order to obtain the smooth operation of this department.
All of these indirect costs must be allocated to some specific department or cost center that we have established in our company. This means that we are not only interested in controlling the operating costs of our production departments, but also the operating costs of all other departments that we have in our company.
Under the Responsibility Accounting system, we have to control our:
Following is the basic departments code structure of our Internal Chart of Accounts:
Indirect Cost Allocation Procedure
Indirect Costs are normally
identified as Fixed Costs, and their allocation is usually simple: salaries and wages are charged to managers and
other personnel who are not directly engaged in production; rent is
prorated to departments; office supplies are charged to each department; depreciation is charged to machines and other fixed
assets within the department, and so on.
An Exception of Direct Cost:
Department Z assembles refrigerators. Each refrigerator requires 16 screws and 4 bolts, but Department Z receives these parts in full cases. The cost of a case is charged to
the department, and later this cost will be absorbed as part of the
indirect cost by multiple job-orders during the period.