Essay: Allocation of Costs

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Essay: Allocation of Costs

Sample Essay

One can say that cost allocation in an organization is a way of placing and assigning costs of products, services which are deemed necessary for the smooth running of the organization. An organization seeks to allocate cost when it runs multiple activities which come from different sources. We can recall that direct cost are those costs we can easily credit to a particular product or service, while indirect costs are costs not easily placed into a category , but are useful in the smooth of the organization, these indirect costs include shared office costs, salaries of financial and executive officers  or costs of audit reports. Since these indirect costs cannot be credited to a particular product easily, it is argued that the best method of allocating such costs is selected (Tishlias, 1992).  Each of the products produced in a firm should have a portion of the indirect costs so that it will be easy to compute the profitability of the product. The computations will thus be reliable and accurate.

United Services Automobile Association (USAA) is a Company with a number of departments namely investing, banking and insurance. However it should be noted that this three departments operate exclusively. It therefore means that the indirect costs will be shared among the products in each of the departments in order to determine the profitability of each product.  The focus here will be on the insurance departments which have several products including personal property and casualty insurance, whole life insurance and term life insurance. The company reported fixed costs worthy $2,000 million in the financial statement of 2009 (Banknet, 2010). These costs need to be allocated to the three major products produced in this department so that the profitability of each is easily determined and thus it will be possible to decide on whether to wipe a product or keep it.

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