Today

1
Today

• If you took the exam, it counts for ½ the final
  exam grade (unless you do better on the final).
• Exams are not a group exercise (they are to be
  individually completed).
• Japans Q How is new technology affecting the
  overhead costs of companies in the US and are
  companies spending too much trying to keep up?

2
Clarifications

• Grading Scheme
• One major mark reduction (e.g., A to B) for
  each fundamental errors.
• One minor mark reduction (e.g., B to B) for
  each unnecessary assumption.
• Its necessary to clearly label.
• Its cool to provide clarifying comments.

3
Clarification

• Taiwan did not elect to take the second chance
  opportunity on last weeks assignment.
• If a delivery issue has occurred, I need a
  hard-copy revision in my mailbox before 330.
• Reason for clarity I would like to discuss FAS
  159 later today.

4
Accounting Ethics

• I side with Honest Abe Lincoln.
• Every man has his price (Abe lived in a male
  dominated society).
• Ideally, your price is quite high.

5
A New Game

• Games seem to produce a more lively atmosphere.

6
The writing issue

• Why clear concise writing is important
• handout
• Is that all I said?
• Managers / Partners quit reading quickly
• why technical writers need training for
  accounting

7
FAS 159 Summary

• The objective is to improve financial reporting
  by providing entities with the opportunity to
  mitigate volatility in reported earnings caused
  by measuring related assets and liabilities
  differently without having to apply complex hedge
  accounting provisions.

8
Final BQ 1

• Japans Q How is new technology affecting the
  overhead costs of companies in the US and are
  companies spending too much trying to keep up?

9
Service Dept. Costs Why Assign Them?

• Cost Control and Efficiency
• Provides incentives for efficient performance by
  service department managers
• Motivates prudent use of service outputs by
  production managers
• Reassign Full Costs to End Products
• Know full costs for decision making purposes

10
Service Dept. Costs Magnitude

• Compaq Computer (2001)
• Approximately 1 in 10 employees worked on SAP
  implementation service.
• These are not low-paid employees
• (This hints that the value of information is
  pretty large)

11
The Need for Cost Allocations
First Stage Allocations Service department costs
are allocated to operating departments.
Service Department (Cafeteria)
Operating Department (Machining)
Service Department (Accounting)
The Products
Operating Department (Assembly)
Service Department (Personnel)
12
Direct Method
Service Department (Cafeteria)
Operating Department (Machining)
Cost of servicesbetween service departments
areignored and all costs areallocated
directlyto operatingdepartments.
Service Department (Custodial)
Operating Department (Assembly)
13
Example
14
Direct Method Example

• Assign Cafeteria costs to the Operating
  Departments
• Machining 360,000 ? 20 employees (20 emp.
  30 emp.)
• Assembly 360,000 ? 30 employees (20 emp.
  30 emp.)

15
Direct Method Example

• Assign Custodial costs to the Operating
  Departments
• Machining 90,000 ? 25,000 ft2 (25,000 ft2
  50,000 ft2)
• Assembly 90,000 ? 50,000 ft2 (25,000 ft2
  50,000 ft2)

16
The Direct Method

• Very Simple
• Meets the goal of assigning all service
  department costs to operating departments
• Can significantly distort costs (i.e., assign
  costs unfairly)

17
Step Method
Operating Department (Machining)
Service Department (Cafeteria)
Service departmentcosts are allocatedto other
service and operatingdepartments. Once
allocated, the service dept. is closed (I.e. no
return allocations).
Service Department (Custodial)
Operating Department (Assembly)
18
Step Method Example
19
Step Method Example

• Assign Cafeteria costs to the User Departments
• Custodial 360,000 ? 10 employees (10 20
  30)
• Machining 360,000 ? 20 employees (10 20
  30)
• Assembly 360,000 ? 30 employees (10 20
  30)

20
Step Method Example

• Assign Custodial costs to the Operating
  Departments
• Machining 150,000 ? 25,000 ft2 (25,000 ft2
  50,000 ft2)
• Assembly 150,000 ? 50,000 ft2 (25,000 ft2
  50,000 ft2)

21
The Step Method

• Pretty Simple
• Meets the goal of assigning all service
  department costs to operating departments
• Arbitrary First Stepnote that if Custodial
  costs were assigned first, Machining cost would
  be 4,375 higher and Assembly costs would be
  4,375 lower. Who is unhappy?
• Can distort costs (i.e., assign costs
  unfairly) however, distortion is typically
  less severe than via the direct method.

22
Reciprocal Method
Service Department (Cafeteria)
Operating Department (Machining)
Interdepartmentalservices are givenfull
recognitionrather than partialrecognition as
withthe step method.
Service Department (Custodial)
Operating Department (Assembly)
23
The Reciprocal Method - Calculation

• For any department, the following is true
• Total Cost Direct Cost Allocated Cost
• CafeRC 360,000 15/75 CafeRC 5/82 CustRC
• CustRC 90,000 10/75 CafeRC 2/82 CustRC
• Solving for two-equations, two-unknowns, we get
  fully reciprocal costs
• CafeRC 461,842
• CustRC 155,367

24
The Reciprocal Method - Calculation

• Compute a cost per unit of service
• CafeRC 461,842 / 75 employees 6,158 per
  person
• CustRC 155,367 / 82k sq. feet 1,895 per sq.
  ft (000)
• Machining receives 170,535 in allocated costs
• Assembly receives 279,490 in allocated costs
• Total allocated service department costs
  450,025 (a 25 rounding error exists)

25
The Reciprocal Method

• Not Simple but Excel makes it easy.
• Meets the goal of assigning all service
  department costs to operating departments
• Not Arbitrary.
• Does not distort costs.

26
The Reciprocal Method

• Enables company to make better outsourcing
  decisions. For example, you know it costs 6,158
  to feed each employee every yearmany argue this
  number is a useful benchmark to compare against
  3rd party prices.