Linear Algebra and Cost Allocations: Some Examples.

Abstract The use of systems of linear equations in financial analysis and accounting is a relatively recent and promising development. One of the first papers in this area appeared in Accounting Research in 1957. Since then, much additional work has been done. For example, a recent study sets forth the accounting system in terms of the linear programming model and thus brings to bear on the problems of accounting the entire body of network analysis and linear programming theory. In cost accounting, linear algebra can be useful in representing and solving allocation and analysis problems. The purpose of this paper is to illustrate the application of linear algebra to the problem of reciprocal cost allocation and three additional allocation problems. First, the analysis of costs charged to various departments and inventory accounts in a simple process cost system. Second, the analysis of residual cost balances in cost collection centers under changing cost incurrence conditions. Third, the analysis of product costs under varying levels of expenditures.