Chapter 6, Problem 1RQ

How are product costing and cost allocation related?

To determine

Explain the relationship between product costing and cost allocation.

Answer to Problem 1RQ

Product costing and cost allocation are related to each other as product costing is the initial step for allocation of cost to the different products.

Explanation of Solution

Cost allocation:

Cost allocation refers to the process where the common cost of the production and service rendered to the various departments of the business are distributed. It is used to calculate the actual cost attributed to a specific department.

The main purpose of cost allocation is providing detailed cost information to the management. It is essential because it is the process through which cost incurred in producing a product or service is determined. If costs are wrongly allocated a business would be wasting resources on products that are improperly determined as profitable. It is used to calculate the actual cost attributed to a specific department.

The relationship between product costing and cost allocation:

Product costing: It is the cost of a product that is incurred by a company when creating a product. It includes direct materials, direct labor, factory overheads and consumable production supplies.

Cost allocation: It is the process of distribution of all the estimations of overheads among different products. The cost allocation is necessary to trace product costing to the products and evaluate the data.

Hence, product costing and cost allocation are related to each other as product costing is the initial step for allocation of cost to the different products. The cost cannot be allocated without knowing the cost of the product.