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Allocated Costs

Another problem that makes using cost and profit numbers challenging is that they often contain (arbitrary) allocations of costs. To illustrate this, suppose we have a company that is expecting to break even in terms of overall profits. They have two products (or divisions), and they want to see how each is doing. They know to distinguish between fixed and variable costs, so they’ve calculated the following profitability numbers:

Product 2 is making ...

From

Cover of Financial Literacy for Managers: Finance and Accounting for Better Decision-Making

Note

The way specific costs are allocated can affect your profitability. Through a case example, learn why you need to understand how costs are allocated before making key decisions.