Purposes of Cost Allocation

Cost allocation is the assigning of a common cost to several cost objects. For example, a company might allocate or assign the cost of an expensive computer system to the three main areas of the company that use the system. A company with only one electric meter might allocate the electricity bill to several departments in the company. Cost allocation implies that the assigning of the cost is somewhat arbitrary. Some people describe the allocation as the spreading of cost, because of the arbitrary nature of the cost allocation. Efforts have been made over the years to improve the bases for cost allocation.… Read the rest

Methods of Allocating Overhead Costs

Overhead cost is an ongoing  expense  of operating a business and is usually used to group expenses that are necessary to the continued functioning of the business, but cannot be immediately associated with the products/services being offered as in the costs do not directly generate  profits.

Overhead cost includes indirect product cost or indirect cost of responsibility center. Indirect product cost is known as manufacturing overhead whereas indirect cost of responsibility center is known as non-manufacturing cost. Manufacturing overhead is those manufacturing costs that are incurred to a variety of products. It cannot be traced to individual products like depreciation and insurance of manufacturing equipment, cost of occupying, managing and maintaining a production facility.… Read the rest

Critical Evaluation of IAS 37

The International Accounting Standards Committee (IASC) issued IAS37 Provisions, Contingent Liabilities and Contingent Assets in September 1998. It replaced parts of IAS10 Contingencies and became operative for annual financial statements covering periods beginning on or after 1 July 1999.

The objective of this standard is to ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets and that sufficient information is disclosed in the notes to enable users to understand their nature, timing and amount. The key principle of IAS37 is that a provision should be recognized only when a liability exists. Planned future expenditures are not recognized as provisions or contingencies, even if the board of directors has authorized them.… Read the rest

Bank Risk Exposure Types – On-balance Sheet and Off-Balance Sheet Exposures

Generally, credit risk is related to the traditional bank lending activities, while it also comes from holding bonds and other securities. Basel (1999) reports that for most banks, loans are the largest and most obvious source of credit risk; however, throughout the activities of a bank, which include in the banking book as well as in the trading book, and both on and off the balance sheet, there are also other sources of credit risk. Various financial instruments including acceptances, inter-bank transactions, financial futures, guarantees, etc increase banks’ credit risk. Therefore, it is indispensable to identify all the credit exposures— the possible sources of credit risk for most banks, which can also serve as a starting point for the following parts of this work.… Read the rest

Credit Policy in Receivable Management

Concept of Credit Policy

The discharge of the credit function in a company embraces a number of activities for which the policies have to be clearly laid down. Such a step will ensure consistency in credit decisions and actions. A credit policy thus, establishes guidelines that govern grant or reject  credit to a customer, what should be the level of credit granted to a customer etc. A credit policy can be said to have a direct effect on the volume of investment a company desires to make in receivables.

A company falls prey of many factors pertaining to its credit policy.… Read the rest

Credit Management – Managing Trade Credit and Accounts Receivable in Business

“The purpose of any commercial enterprise is the earning of profit, credit in itself is utilized to increase sale, but sales must return a profit.” –  Joseph L. Wood

The primary objective of management of receivables should not be limited to expansion of sales but should involve maximization of overall returns on investment. So, receivables management should not be confined to mere collection or receivables within the shortest possible period but is required to focus due attention to the benefit-cost trade-off relating to numerous receivables management.

Principles of  Credit Management

In order to add profitability, soundness and effectiveness to receivables management, an enterprise must make it a point to follow certain well-established and duly recognized principles of credit management.… Read the rest