REASONS FOR COST ALLOCATIONS

It is the process of assigning costs when a direct measure does not exist for the quantity of resources consumed by a particular cost object. To provide information for economic decisions

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To motivate managers and other employees

To justify cost or compute disbursement To measure income and assets for reporting to external parties

ZIMMERMAN APPROACH
He strongly agreed with Kaplan and Cooper approach that cost allocations play a vital role in motivating and controlling managers. He pointed out that some service/support costs are fixed in the short-run and this may give rise to opportunity costs in form of delays/degradation of service which may add to business costs but may change with the level of primary inputs (e.g. labour) in long term.

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He also argued that these opportunity costs and consequent longterm incremental actual costs should be taken into account by individual managers when deploying labour resources. Such costs are hard to observe/measure, but allocating current average cost can serve to proxy them.

ZIMMERMAN APPROACH
The following diagram will help the managers to take into account the additional costs of using labour to recover the burden of overhead costs.
Isocost line 1 represents relative prices if the demands placed by labour on service departments (e.g. canteen) are neglected and only the actual cost of labour itself is considered. If the true cost of using labour resource is understated, more labour hours will be used. As a result, managers will make decisions based on false price information. If labour is charged with the burden of service cost recovery, the least cost combination shifts to Point 2. Hence, the hidden costs of using labour are recognised at this point as it is nearer to real optimum. Overhead is included in unit product cost by charging labour hours with fixed overhead burden. At Point 2, capital-intensive method (C2) is adopted rather than labour one (L2).

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ZIMMERMAN APPROACH
DOES RENT MAKE A GOOD CASE FOR COST ALLOCATION?

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Usually long-run volume-related costs are allocated to product

unit level. Zimmerman mentioned that additional consumption results to a rise of primary input (e.g. labour) which leads to opportunity costs in form of delays/degradation of service that may raise actual costs in the long-run. Therefore, it is not appropriate to allocate rent unless a huge increase in labour force was being considered-necessitating a new factory. Works canteen, payroll and personnel costs are considered to be a realistic possibility of good case for cost allocation.

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PRODUCT COSTING PROCEDURES IN ORGANISATIONS BY ZIMMERMAN

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It is noted that AC allocates historical costs, and therefore the unit costs estimated by this system may or may not be reasonably good estimates of opportunity costs.

M A K I N G

ZIMMERMAN APPROACH
EVALUATION
The measurement of opportunity costs could be difficult and resource-intensive because special studies are required to identify all the relevant alternatives of possible use of resources and estimate the costs and benefits of each alternative. This system can produce inaccurate unit cost estimates partly due to the biases embodied in the overhead allocation methods applied. If the overhead allocation method does not represent the cause-andeffect relationship between the final product (service or job) and the overheads, the unit cost estimates could be more or less inaccurate especially in multi-product plants. Both the product cost and the period cost include fixed, semi-variable and variable costs, and both are historical costs. Therefore, it is important to report both product and period costs for decision makers.

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