Essay: Allocation of Fixed Cost

Sample Essay

In most of the companies, fixed costs outweigh the variable costs. This implies that the method used to allocate the fixed costs should be effective otherwise; it will not be easy to identify the products, divisions or even departments that are making profits or losses. Shih (2005) argues that the best method to allocate costs is to make sure that each of the products produced by a firm bears a significant share of both the fixed and the variable costs. Since the unallocated costs are not involved directly in the production of a specific product, they should not be allocated to a specific product to determine the profitability of that product.

Boeing Company, which deals with the production of so many products, is not an exception. This implies that the fixed costs should not be allocated to a specific product or division. For instance, fixed costs $20,500 million were reported on the financial statements of Boeing Company in the year 2009 (The Board of Directors, 2010). There are three major divisions at Boeing Company namely BCC (Boeing Capital Corporation) which accounts for 0.96% of the sales, IDS (Integrated Defense Systems) accounting for 49.29% of the sales and Commercial airplanes accounting for 49.86% of the sales (McNerney & Bell, 2008). This makes the commercial airplanes the most prominent and thus the one that has been allocated most of the fixed costs.

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