The best method to determining weights for the stand-alone revenue-allocation method is
What is the Stand-Alone Cost Method?The stand-alone cost method allocates group costs to users as a proportion of the costs that would have been individually incurred by each user. This approach is a relatively simple and understandable method for allocating costs. Show Example of the Stand-Alone Cost MethodFor example, the field service department and the returns department separately want to ship repaired appliances to two customers located in the same town. To do so individually, the field service department would have to pay $300 in shipping charges, while the returns department would have to pay $150. The company instead decides to rent its own truck and driver to make the deliveries, at a total cost of $330. Under the stand-alone method, the field service department is charged $220 of the delivery cost, under the following formula: $300 Independent field service delivery ÷ ($300 Independent field service delivery + $150 Independent returns department delivery) = 66.67% of total cost of independent deliveries 66.67% x $330 Consolidated delivery = $220 Cost allocation The same formula is used to charge $110 to the returns department. These three approaches to determining weights for the stand-alone method result invery different revenue allocations to the individual products:FinanceMaster:11+1*$280=0.50*$280=$140WordMaster:11+1*$280=0.50*$280=$140Which method is preferred? The selling prices method is best, because the weights explic-itly consider the prices customers are willing to pay for the individual products. Weightingapproaches that use revenue information better capture “benefits received” by customersthan unit costs or physical units.11The physical-units revenue-allocation method is usedwhen any of the other methods cannot be used (such as when selling prices are unstable orunit costs are difficult to calculate for individual products).Incremental Revenue-Allocation MethodTheincremental revenue-allocation methodranks individual products in a bundleaccording to criteria determined by management—such as the product in the bundlewith the most sales—and then uses this ranking to allocate bundled revenues to individ-ual products. The first-ranked product is theprimary productin the bundle. The second-ranked product is thefirst-incremental product, the third-ranked product is thesecond-incremental product, and so on.How do companies decide on product rankings under the incremental revenue-allocation method? Some organizations survey customers about the importance of eachof the individual products to their purchase decision. Others use data on the recentstand-alone sales performance of the individual products in the bundle. A thirdapproach is for top managers to use their knowledge or intuition to decide the rankings.Consider again the Word + Finance suite. Assume WordMaster is designated as theprimary product. If the suite selling price exceeds the stand-alone price of the primaryproduct, the primary product is allocated 100% of itsstand-alonerevenue. Because thesuite price of $280 exceeds the stand-alone price of $125 for WordMaster, WordMaster isallocated revenues of $125, with the remaining revenue of $155 ($280 – $125) allocatedto FinanceMaster:11Revenue-allocation issues also arise in external reporting. The AICPA’s Statement of Position 97-2 (Software Revenue Recognition)states that with bundled products, revenue allocation “based on vendor-specific objective evidence (VSOE) of fair value” isrequired. The “price charged when the element is sold separately” is said to be “objective evidence of fair value” (see “Statementof Position 97-2,” Jersey City, NJ: AICPA, 1998). In September 2009, the FASB ratified Emerging Issues Task Force (EITF)Issue 08-1, specifying that with no VSOE or third-party evidence of selling price for all units of accounting in an arrangement, theconsideration received for the arrangement should be allocated to the separate units based upon their relative selling prices. What is stand alone revenue allocation method?The stand-alone cost method allocates group costs to users as a proportion of the costs that would have been individually incurred by each user. This approach is a relatively simple and understandable method for allocating costs.
When using the dual rate method What is the fixed cost allocation based on?Financial Accounting
Explanation: Yes, under the dual-rate cost allocation method, when fixed costs are allocated on the basis of actual usage then changes in usage of one division will affect the other division's allocation.
What is reciprocal method?What is the Reciprocal Method? The reciprocal method uses simultaneous equations to allocate the costs incurred by service departments to other departments; allocations are also made between the service departments. This method results in an accurate distribution of costs.
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