The importance of accuracy in cost allocation
It is very crucial for firms to be keen in the way they allocate cost to ensure it is done accurately. This is because accuracy in cost allocated impacts on a firm’s competitiveness and financial viability. The manner in which cost is allocated impacts the success of marketing efforts of a firm (Deo, 2009). This is because costs affect the pricing strategy which ultimately manifests in the market share or revenues, operating expenses, profit margins and customer satisfaction levels. If cost is not accurately allocated product /service pricing will be uncompetitive in the market. Cost allocation should ensure the sales contribution margin per unit exceeds fixed and variable costs per unit. If that does not happen then the firm reports losses as it is unable to cover its cost of carrying out the business (Deo, 2009).
Uncompetitive pricing impacts a firm’s ability to compete in the market and affects revenue targets. If a firm for example quotes low prices than it should had cost allocation been done accurately, it ends up making loses which erode the equity invested by the owners. If the firm makes loses in enough subsequent years it will be unable to secure loan financing from its bankers and eventually will be unable to grow its revenues (Doost, 1996). On the other hand if a firm quotes a higher price than it should, it may be unable to sell adequate quantities because competitors will offer their products at lower prices and reduce demand for its products. The firm will eventually be forced to shut down because it will not be able to sell. Cost allocation also impacts on product and service quality, product/service positioning, marketing efforts, promotion and service delivery which eventually determines competitiveness and sustainability (Doost, 1996). In the event cost allocation is not done accurately product costs are likely be understated and profit generated from each product line can be seriously overstated which will impact on dividends payout and taxation levels (Deo, 2009). The accuracy of cost allocation determines the quality of decisions that managers make and hence influences a firm’s financial performance (Deo, 2009).
References
Deo, P. (2009). Cost allocation in a service industry. The Journal of Applied Business and Economics, 9(4), 94-102. Retrieved from http://search.proquest.com/docview/218718208?accountid=45049
Doost, R. K. (1996). Cost allocation: What purpose does it serve? Managerial Auditing Journal, 11(8), 14-22. Retrieved from http://search.proquest.com/docview/274704508?accountid=45049
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