Cost Allocations and the Design of Accounting Systems for Control.

Abstract The purposes of cost accounting has been stated as to assist in the minimization of costs of performance within the business unit, to provide information basic to the determination of net income and financial position, and to aid in the solution of specialized problems of business management. The article analyses the last two of the stated purpose, which have been the criteria for a long and vigorous debate on the method and extent to which costs should be classified by products in the accounts. If these costs are classified by product, should the allocations be at each stage in the process of production with reciprocal and multi-step distributions of service department costs and with different distribution bases for each type of cost, or should less elaborate methods be used? At one time it was considered adequate for control objectives to establish and incorporate in the system standard product costs. A product cannot be persuaded to explain its variance, instructed to take corrective action, or fired and replaced by a product that would meet standards. For control the accounting system must provide costs classified by organization.