Cost Allocation; General Concepts An organizations service and administrative costs can be substantial, and some or all of these costs usually are allocated to cost objects. Thus, the allocations of service and administrative costs can have a significant impact on product cost and pricing, asset valuation, and segment profitability.

Required

When service costs are allocated, they are grouped into cost pools and then allocated to departments according to some allocation base.

1. Compare and contrast the benefit-received basis and the cause-and-effect basis for cost allocation.

2. Explain what the ability-to-bear criterion means in selecting an allocation base. (CMA Adapted) 7-22 By-Products and Decision-Making; Strategy Lowman Gourmet Products produces a wide variety of gourmet coffees (sold in pounds of roasted beans), jams, jellies, and condiments such as spicy mustard sauce. The firm has a reputation as a high-quality source of these products. Lowman sells the products through a mail-order catalog that is revised twice a year. Joe, the president, is interested in developing a new line of products to complement the coffees. The manufacture of the jams and jellies presently produces an excess of fruit liquid that is not used in these products. The firm is now selling excess liquid to other firms as a flavoring for canned fruit products. Joe is planning to refine the liquid and add other ingredients to it to produce a coffee-flavoring product instead of selling the liquid. He figures that the cost of producing the jams and jellies, and therefore the fruit liquid, is irrelevant; the only relevant concern is the cost of the additional ingredients, processing, and packaging.

Required

How would you evaluate the financial and strategic issues facing Joe in regard to his plan to develop this new line of coffee-flavoring products?