Allocation of Fixed Costs in Electric Storage Company

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Allocation of Fixed Costs in Electric Storage Company

Outline

This is a report on the allocation of fixed costs in an organization. The organization selected for the study is the Electric Storage Company (ESC). The module deals with the review of the organization and its treatment of allocated costs. The financial report in the organization that allocates common costs to a division, product, or service is retrieved. With unallocated costs, the report is recast in order to provide a proper allocation of fixed costs in the organization.

Introduction

Electricity storage association is a global trade association established to foster the improvement and commercialization of energy storage technologies. The main objective is to encourage the expansion and commercialization of competitive and dependable energy storage delivery systems for use by electricity suppliers and their customers. The technologies and applications of electricity storage association range from the rapid power quality purpose to develop the profitability. This purpose is to discharge from a portion of a second in a high-power application to hours in high energy applications. The scales of the high-power side include power quality and uninterrupted power supply applications. It consists of capacitors, flywheels, superconducting magnetic storage, etc. The other side, i.e., the high energy side consists of the application of energy management. (Technologies and applications, 2003).

Recast financial statements can be defined as Financial statements of the business that are adjusted to reflect the actual financial benefits of business ownership. (Recast financial statements, 2009). The recasting of financial statements is required in order to present the adjusted position of the financial statements. In order to present the actual cash flow available to the owner, adjustments are required in the reported financial data.

Activity and time period used for the study

For the identification of allocation of fixed assets, the financial statements of the company for the period 1^st April 2000 to 31^st March 2001 are considered.

The inputs used for the study

For the fixed cost allocation, the previous financial report of the company is used. The fixed cost elements in the total cost are considered for this cost allocation purpose.

Results

The following Table presents the fixed cost allocation of the company for the period 1.4.2000 to 31.3.2001

Particulars

Percentage of total cost

Amount in $

Total Fixed costs for the period:
Production Cost
Distribution Cost
Salary
Wages
Maintenance and repair

45%

25%

15%

10%

155000

69750

38750

23250

15500

7750

Implications from the results

Cost allocation is used for the determination of the cost of services that have to be incurred by a company. It excludes the price of the service and only service costs incurred are considered. It is important to determine the cost allocation of the services that the FAA provides, in order to determine a justifiable fee/charge/tax for those services. Included in cost allocation are direct, indirect, and incremental costs. (Cost allocation, (n.d)).

For the cost allocation purpose along with direct and indirect costs, incremental costs are also considered. Incremental costs are those which measure the changes in output. The differences in the staffing costs are a type of incremental cost.

The Fixed cost allocation reveals that a major portion of the fixed cost pertains to production and distribution. It accounts for about 70% of the total fixed cost incurred for the operations. The fixed cost allocation should help the company to measure the percentage of different cost elements on the total fixed cost of the operations.

Conclusion

In the electricity storage industry, a major percentage of the total cost of operation for a particular period is fixed cost in nature. In such companies, cost allocation is an adaptable method for finding out the actual cost of services incurred by the company. As a company in the electricity storage industry, cost allocation is helpful for ESC to find out the actual cost incurred by the company for the provision of services. The fixed cost allocation of the company reveals that production and distribution costs form a major portion of the total fixed cost. In order to reduce the operating cost, the company has to concentrate on reducing the production and distribution cost.

References

Cost Allocation: Cost allocation concepts. (n.d).

Recast financial statements: Definition. (2009). Valu Adder.

Technologies and applications: Technologies / caes. (2003). ESA: Electricity Storage Association.

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