Well, we have now reached the final episode of the fourth week of our accounting course, and the first week in which we studied managerial accounting. So this whole week was devoted to the process of identification and allocation of costs. And most emphasis was put clearly on indirect costs. So in this wrapping-up episode, I'll put together the so-called road map of cost allocation. And that will sort of repeat something that we did before our example, but that will be right now based on the results or examples. So hopefully that will be better carved in your minds. So that would be, V, tracing and allegation, Road map. Well, let's proceed with some steps. Step 1, This is identification, identify, so it's more, like, comparative, product, Chosen as cost object. Well, in our example, that was the batch of batches. That was the final object that we did just in the previous episode. Now, Step 2, Identify, Direct costs for, This object. Well, in our example those were man-hours. And again, direct materials we sort of set aside. And we did not forget about them, we just didn't include them in these tables, just not to make these tables too cumbersome and too difficult to comprehend. Now the next thing, Step 3, is identify, The cost pools, the indirect cost pools. So basically, you can see, here we just make the choice of what is the object with respect to which we would like to answer this question, how much does it cost? Now the second one was the treatment of all direct costs. So we said that this is an easy part, although that also requires time, effort, money, but we said that this is the easy part. Now from Step 3, we embark on the hard part. First of all, we allocated the costs in a step down method. So we first identify the indirect cost too. Let me remind you, that this sort of simplifies the process, because with respect to these pools, it's much easier to identify the proper costs. So in our example those were five, remember, real estate, general, batches, clips, and assembly. So these are the first three steps. Now let's proceed. Step 4, Select, The cost allocation base. Well, in our example, for real estate, it was the percentage of area. For general, it was the portion of direct labor. So that was the cost base with respect to which we are linking these indirect costs. Then the next comes Step 5. And this is, we develop, Cost allocation rate. Remember these numbers, like 371, 347? Well, in between, as you remember of the process, you can say well, in our example we did some reallocation. Well, wait a minute, so we talk about just the idea of this. First of all, we select the cost allocation base in respect to this base, we define the cost allocation rate. And now comes, I'll put it in red, this is Step 6. Which is so comprehensive and time consuming, that I sort of wanted to emphasize that. And this is, Assignment, Of costs. So here, again, we take all direct costs, And all indirect costs, With the use of CAR. Now, you can say, well, in this process the most lengthy procedure, reallocation, is sort of a method. Well, not quite, because when we select this to develop CARs and to assign these costs, we have to go over these processes. But, like I said, sometimes people believe that they're not using this step-down approach. It's only the one that we've discussed. In most textbooks on managerial accounting, there are many ways how this is done. But again, the initial point and the final point is the same. Well, the results may vary, because it does depend upon this process what the final amount of direct costs will be charged with respect to each of product pool, and then finally to each product batch, if you will. And those may be really different, and that has some repercussions. Because sometimes they provide various motives, and they provide incentives for the people that are different. But still, this is the process that we've just discussed, and this is the idea that we've talked about. Now, let me finalize this week by saying that, so we dealt, With cost allocation. And in this process, we said that cost allocation basis and cost allocation rates that was an important result. But in this part, we took cost allocation basis as something material, like a product or a batch of products. And then we saw that the cost drivers producing that were close linked to that were some numbers of man hours, and that was associated with that. What if we changed the view? And what if we looked at our production processes or our activities, and said, maybe it's better to take the activity itself as a cost base. So we will see that it is not the number of something that generates costs, it's a certain procedure, a certain activity. And this leads to a much more advanced approach to costing, that is called activity based costing, which sometimes it is used in t abbreviation of ABC. And that is the thing that we will study in the first part or next week. And from that we will move on to another extremely important special point here that is dealing with relevant costs and both these parts. And the special role in cost will be almost immediately applicable to our processes evaluation. So here, I would like to stop. That's been quite a long week. We've had lots of discussions that required a lot of mental emphasis and mental activity and also concentration. So I appreciate your patience, and I wish you good luck with your assignments, and I'll see you all next week.
