It is important for management to understand how different departments and customers contribute to the profitability of a company.

It is important for management to understand how different departments and customers contribute to the profitability of a company. Profitability is comprised of both price and costs. Costs can be allocated using a variety of methods. Understanding cost flows and the various methods of allocating costs is important in ensuring profitability.

• Evaluate potential cost allocation methods that would impact an organization’s selling prices, and provide examples.
• Communicate decisions faced when collecting and allocating indirect costs to customers, and provide examples.
• Elaborate on why costs for one customer might be different from that for another customer being sold the same product or service.