Now in the next three episodes starting from this,

we will study the example of indirect cost allocation

for the plant that makes badges.

Now, we will go over three steps of this process.

In the first episode,

we'll talk about initial allocation.

Then the key part,

the second one is reallocation.

And then in the third part,

we will calculate the cost allocation rates and then we'll see,

how we'll be able to apply this approach to calculate what is

the required proportional share of indirect cost charged

against any product or any batch of products.

So, this is the example.

So, this part is cost allocation one.

We have badge manufacturing and we have five cost pools.

They are the following.

So these are cost pools.

Two, service pools and these include;

real estate and then general.

And then three product pools and these are badges themselves,

the body, then this is clips and then assembly.

So, this is an extremely simplistic process.

So, we make badges,

we make clips we glue them together.

Check that they really don't fall off and that's we're all set.

Now, what are the indirect cost components here?

Again direct costs here,

we do not discuss in detail.

We'll be able to properly associate how much of metal goes to

badges or to clips and then how many man hours of work.

So, this is sort of an easy part.

So we talk only about indirect cost allocation.

So, what are indirect cost components?

Let's see what they are.

Well, first of all,

this is indirect labor and this is $11,000.

Now, the next one is warehousing and this is $6,800.

And then other, whatever they are, this is $15,200.

That brings the total amount of indirect costs to $33,000.

Now, the first important interim stop, for example.

So this amount, we calculate on the basis of all the people who say that this goes here,

then we see where these indirect costs actually arise,

in what departments, on what equipment.

So, this initial process is the procedure

of collecting and measuring these indirect costs.

But, we do not associate them with the final objects or final products.

So, these procedures normally,

this is done by lots of people who are actually linked to these processes.

For example, if we come at an enterprise as an outside consultant,

we may not be able to come up with these numbers unless and until we

talk with the people who actually are involved in these processes.

So, these numbers we take as givens.

Now, what is the next procedure?

Next procedure is very important.

This is initial indirect cost allocation.

So here, what does that mean initial?

We allocate these costs that were shown

on the previous page of flip chart over these five pools.

Again, how is this process actually implemented?

So, the costs are assigned to the pools where actually they arise.

So there is a clear link.

Because we said that these pools they are sort of

intermediate cost objects and that's what we do.

In order to do that, we come up with a table.

Again, this table is kind of long but it's very important.

So I will produce that together with you.

So, first of all, these are components.

So, this is total.

And here are all these pools.

Service pools and they are two real estate and then general,

and product pools and these are three.

So, badges, clips, and assembly. I'll put them like this.

Now, so we have all these numbers from the previous page.

So indirect labor, we have warehousing,

and we have other.

And obviously as always,

there is a final bottom line which is total.

So we've created the table and now we have to fill it up with numbers.

Now, see what happens.

So these numbers we know the totals that were in the previous part.

So this is 11,000.

This is 6,800, and this is 15,200.

Together, this is 33,000.

So far we haven't done anything new.

But now, we perform this initial allocation.

So, we go over all these five pools and see where let's say indirect labor is used.

For example, in real estate we say there's no indirect labor at all.

And then we just associate parts of this indirect labor

with these pools and then come up with folding numbers 6,000, 3,700, 1,300.

And you can see that's all actually exhausted.

So, in the sample there is nothing either.

That means that, in assembly there is no indirect labor.

So, all the people who work there they are associated with direct labor.

Now, let's do the next part.

So, from warehousing we say that this is 800,

then this is 2,500,

then this is 1,500,

1,000, and 1,000 here.

Again, no wonder that the sum is 6,800 because we allocating,

we are not creating these costs.

When we use these numbers,

we already have measured all the indirect costs t

hat are being produced by these pools "to be produced."

Now, I go fast but all this clearly is in your handouts.

And when you study,

that's my overall recommendations,

from now on there are quite a few tables on this course,

so you'll be much better off if you watch

these videos and then you have these printouts or handouts in front of you.

That helps a great deal.

Now, if I did the same,

here will be 5,400, 1,500.

That will be 5,800, 2,000, 500.

And overall that will be 6,200.

That will be 10,000.

That will be 11,000.

That will be 4,300.

And that will be 1,500.

Now, these I will circle.

We will need them later.

But for now we'll see what happens.

Again, oftentimes people don't comment on this and that results in misunderstanding.

So, this break down with all these 50 numbers,

that occurs as a result of the human activity who say,

"Well, these components of indirect costs they occur in these amounts in these pools."

So again, for us,

this is more or less a given.

But this is a lot of work here in

the measurement and in the association with the corresponding pool. So far so good.

So we did the initial indirect cost allocation.

And now, I will draw a chart here and this will be indirect cost components.