Glossary
Cross-Subsidy
Tags: Glossary
In cost accounting, the inequitable assignment of costs to cost objects leads to overcosting or undercosting them relative to the amount of activities and resources actually consumed. This may result in poor management decisions that are inconsistent with the economic goals of the organization.
What is Cross-Subsidy?
Cross-Subsidy
In the world of logistics and cost accounting, cross-subsidy refers to the practice of assigning costs in an unfair or inequitable manner to different cost objects. Cost objects can be anything from products or services to departments or projects within an organization. When costs are not accurately allocated to these cost objects, it can lead to overcosting or undercosting, which can have significant implications for the organization's management decisions and overall economic goals.
Overcosting occurs when a cost object is assigned more costs than it actually consumes in terms of activities and resources. This means that the cost object appears to be more expensive than it truly is, potentially leading to incorrect pricing decisions or resource allocation. On the other hand, undercosting happens when a cost object is assigned fewer costs than it actually consumes. This can result in the cost object appearing cheaper than it should be, leading to potential underpricing or inadequate resource allocation.
The consequences of cross-subsidy can be detrimental to an organization. When cost objects are overcosted, it may discourage the production or consumption of certain products or services that are actually profitable. This can lead to missed opportunities for revenue generation and hinder the organization's growth. Conversely, undercosting can create a false sense of profitability, leading to the allocation of resources to unprofitable ventures or the underpricing of products or services, which can ultimately result in financial losses.
To avoid the negative effects of cross-subsidy, it is crucial for organizations to implement accurate and fair cost allocation methods. This involves identifying the activities and resources that are directly or indirectly consumed by each cost object and assigning costs accordingly. By doing so, organizations can ensure that their management decisions are based on reliable cost information, enabling them to make informed choices that align with their economic goals.
In conclusion, cross-subsidy in logistics and cost accounting refers to the inequitable assignment of costs to cost objects, leading to overcosting or undercosting. This can have significant implications for an organization's management decisions and economic goals. By implementing accurate and fair cost allocation methods, organizations can avoid the pitfalls of cross-subsidy and make informed decisions that contribute to their overall success.