Scarborough Sales, a real estate company specializing in apartment rentals and home sales, is having difficulty in gathering appropriate cost information for evaluating its operations. It owns several large apartment complexes and sells homes owned by builders or existing homeowners. As the company's new accountant you define cost by major activity. You use this information for allocating costs to cost objects. Also, cost pools are created for appropriate cost allocations. The owner of the company is interested in exactly what you have done, and why it appears to be working so smoothly.
Required:
Briefly state the four purposes for allocating costs to cost objects and give two examples of how each can be used for the real estate company.

Question

Quizplus · Accepted Answer

The Answer is The four purposes are:
1. To provide information for economic decisions.
2. To motivate managers and employees.
3. To justify costs or compute reimbursements.
4. To measure income and assets for reporting to external parties.
Examples are:
1. a. Population growth in market area.
b. To determine if the company needs to go into the commercial market.
2. a. Provide sales incentives through commission rates and sales volume goals.
b. Reward employees for selling high margin properties.
3. a. Limit employee expenses on home sales to some percentage of selling price.
b. Provide sufficient customer services to attract new clients.
4. a. Use of proper amortization methods for apartment buildings.
b. Properly accrue commissions at end of each accounting period.

Scarborough Sales, a Real Estate Company Specializing in Apartment Rentals