COST ALLOCATION
The food service manager is able to make better decision if he is aware of the total cost of
operation e.g. it seems qbvious that food cost should be charged to the food sale and beverage
cost to the beverage sale.
The labour charges incurred by the bar tender could be harged to the beverage service and
salary paid to cook be charged to food sales. There are some common costs that can not be
identified easily e.g. rent, light, water bill, laundry charges, telephone bill, etc. can not be
assigned to any one individual department.
Cost allocation is not discussed in any signification detail in the Uniform System of Accountancy.
This cost can be allocated to the different departments depending upon various factors.
MAdvantages of Cost Allocation :
('v The main advantage of cost allocation is that management knows the true financial
position of each department and if so desired the management can take the corrective
measure to make any particular department more efficient and control its overhead and other
costs. In case the costs are not allocated to the respective departments and it is debited to the
overall gross profit then management may never come to know which department is
economically viable or not or which department is more viable and which is the least viable. The
cost allocation also makes department more efficient and they also impose self control to show
better financial results. The cost allocation helps individual Restaurant, Bar, Room, etc. to fix
the selling price. The different [Link] may operate on different food cost in order to cover their
allocated over heads and other costs and still make a reasonable profit. With the knowledge of
full costs of each department and may be for each banquet party the management can decide any
revision in price or if the particular department is to be closed altogether or if the sales target are
to be revised upwardly to cover the over heads and still make reasonable profit.
Difficulties with Allocation :
It is impossible to satisfy all the departments heads no matter how carefully the basis for
allocation the cost are designed. These basis are fixed for long times and can not be changed
very regular ly. Sometimes a restaurant may close for renovation or it may organize a special
theme lunch or dinner but the allocation of costs will remain the same. To over come this
problem usually a meeting of all department heads is called and management tries to reach
consensus about allocation of costs.
There are four steps which are taken to allocate costs and these are :
1. The first step is to identify II the departments to which allocation of costs will take place.
2. The cost which is to be allocated to the department must also be clearly
identified. In case certain cost can not be easily allocated to different departments then the cost
should be debited to the concerned department's total earnings.
3. The methods to be adopted to allocate the costs to different departments .
.These are various methods of allocating cost a consensus among department heads must be
reached to decide a particular method.
4. . Allocation basis must be established. A cost allocation base is a rational factor that is
used to divide an undistributed cost between applicable cost centers. The allocation method is
chosen without considering the allocation base e.g. an allocation base (how power expenses to
be divided among restaurants) can be fixed and than the methods used to charge restaurant.
Basis of Cost Allocation :
There is no set procedure laid down for cost allocation . The cost allocation may differ
from place to place, from one type of organization to another, from management to
management.
The direct cost is automatically debited to individual departments. It is the indirect cost
which is to be allocated to different departments. This indirect cost should not be arbitrarily
divided among departments but it should have a meaningful relationship between the
profit centre and the amount of indirect cost that is to be allocated to it. To allocate a
particular indirect cost to various departments there may be more than one base to
choose from, one hotel may find one particular method more suitable and another hotel
department head may agree to other method of allocation .
}1
The following are the different basis for a/locating the cost.
- .
S. No. Costs Basis for Allocation
1 Interest 1. Total Capital employed in the department
2. Square feet of area occupied
3. Ratio to Sales
2 " Insurance 1. Square feet of area occupied.
2. Amount of each department insured
3. The total value of each asset
3 Taxes 1. Ratio to Sales
2. Basis of Tax
4. Rent 1. Ratio to Sale
2. Square feet of area occupied.
5. Depreciation 1. Square feet of area occupied (Building)
2. Value of the assets
3. Number of hours machines are used.
6. Telephone 1. Each department can be metered
2. Number of extensions sanctioned
7. Employee's Benefits
3.
1.
Ratio to sales.
Number of employees.
.
2. Refer to payroll records
8. Advertisement 1. Ratio to sale
9. Light & Power 1. Number of light / power points.
2. Cubic feet of area occupied.
3. Number of hours the department operates .
4. Ratio to sales.
The above mentioned basis of allocation are some of th.e basis recommended but a
management may adopt altogether a different base for ailocation of indirect cost to
different departments. As far as small amount of indirect cost like. light, local telephone
bill, etc. is concerned, there is usually not much dispute on its allocation but wh$n the
cost to be allocated is of significant amount like rent, power expenditure then all
department heads are very particular about its allocation and more realistic base is to
be adopted.
Methods of Allocation :
There are three methods that can be used to allocate costs. These are Direct Method,
Step Method and Formula Approach.
..