Allocation of Support Activity Costs and Joint Costs

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• Allocation of Support Activity Costs and Joint
  Costs

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Service Department Cost Allocation
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Service Department Cost Allocation
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Service Department Cost Allocation
Second, we measure theconsumption of
theallocation base in theproduction departments.
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Service Department Cost Allocation
Third, we allocate the servicedepartment cost
based on the relative amount of theallocation
base consumed ineach production department.
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Service Department Cost Allocation
What happens toservice departmentcosts after
they areallocated to production departments?
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Service Department Cost Allocation
I get it. They becomea part of the
overheadthat is applied toproducts with
apredeterminedoverhead rate.
Allocated service departmentcosts become a part
of themanufacturing overhead in each
production department.
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Service Department Cost Allocation
I get it. They becomea part of the
overheadthat is applied toproducts with
apredeterminedoverhead rate.
Thats right. Take a look atthis flow chart. I
think it will summarizeour discussion of
theallocation process.
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Service Department Cost Allocation
First Stage Allocations Service department costs
are allocated to production departments.
Service Department (Cafeteria)
ProductionDepartment (Machining)
Service Department (Accounting)
The Product
ProductionDepartment (Assembly)
Service Department (Personnel)
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Service Department Cost Allocation
Service Department (Cafeteria)
ProductionDepartment (Machining)
Service Department (Accounting)
The Product
ProductionDepartment (Assembly)
Service Department (Personnel)
Second Stage Allocations Production department
overhead costs, plus allocated service department
costs, are applied to products usingdepartmental
predetermined overhead rates.
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Selecting Allocation Bases
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Selecting Allocation Bases
Personnel Number ofemployees
Custodial Squarefootage
Receiving Unitshandled
Cafeteria Number ofemployees
Simplicity
Security Squarefootage
Power Kilowatthours
Accounting Staffhours
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Selecting Allocation Bases
Personnel Number ofemployees
Custodial Squarefootage
Availabilityof space orequipment
Receiving Unitshandled
Cafeteria Number ofemployees
Security Squarefootage
Power Kilowatthours
Accounting Staffhours
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Selecting Allocation Bases
Personnel Number ofemployees
Custodial Squarefootage
Benefits receivedby the productiondepartment
Receiving Unitshandled
Cafeteria Number ofemployees
Security Squarefootage
Power Kilowatthours
Accounting Staffhours
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Interdepartmental Services
Problem Allocating costs when service
departmentsprovide services to each other
Solutions Direct Method Step Method
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Direct Method
Service Department (Cafeteria)
ProductionDepartment (Machining)
Cost of servicesbetween service departments
areignored and all costs areallocated
directlyto productiondepartments.
Service Department (Custodial)
ProductionDepartment (Assembly)
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Direct Method Example
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Direct Method Example
Allocation base Number of employees
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Direct Method Example
Allocation base Number of employees
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Direct Method Example
Allocation base Square feet occupied
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Direct Method Example
Allocation base Square feet occupied
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Step Method
Service departmentcosts are allocatedto other
service departments andto productiondepartments,
usuallystarting with theservice
departmentthat serves thelargest number of
other service departments.
Service Department (Cafeteria)
ProductionDepartment (Machining)
Service Department (Custodial)
ProductionDepartment (Assembly)
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Step Method
Service Department (Cafeteria)
ProductionDepartment (Machining)
Once a servicedepartments costsare allocated,
other servicedepartments costsare not
allocatedback to it.
Service Department (Custodial)
ProductionDepartment (Assembly)
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Step Method
Service Department (Cafeteria)
ProductionDepartment (Machining)
Custodial willhave a newtotal to allocateto
productiondepartments itsown costs plusthose
costsallocated fromthe cafeteria.
Service Department (Custodial)
ProductionDepartment (Assembly)
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Step Method Example
We will use the same data used in the direct
method example.
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Step Method Example
Allocation base Number of employees
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Step Method Example
Allocation base Number of employees
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Step Method Example
Allocation base Number of employees
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Step Method Example
New total 90,000 original custodial cost plus
60,000 allocated from the cafeteria.
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Step Method Example
Allocation base Square feet occupied
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Step Method Example
Allocation base Square feet occupied
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Comparison of Methods
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Fixed Versus Variable Costs
Are fixedand variablecosts allocateddifferently
?
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Fixed Versus Variable Costs
Problem Allocating commonfixed costs using
avariable activityallocation base
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Fixed Versus Variable Costs
Problem Allocating commonfixed costs using
avariable activityallocation base
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Dual Cost Allocation
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Dual Cost Allocation
Allocatebudgeted amountsto operating
departmentsin proportion to thelong-run
averageusage of theallocation base.
Charge toproductiondepartments at abudgeted
rate timesactual short-run usage of the
allocation base.
Budgeted costs should be allocatedto avoid
passing on inefficienciesfrom the service
departments.
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Dual Cost AllocationExample
SimCo has a maintenance department and two
productiondepartments cutting and assembly.
Variable maintenancecosts are budgeted at 0.60
per machine hour. Fixedmaintenance costs are
budgeted at 200,000 per year.Data relating to
the current year are
Allocate maintenance costs to the two operating
departments.
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Dual Cost AllocationExample
Variable costs are allocated based on hours used.
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Dual Cost AllocationExample
Variable costs are allocated based on hours
used. Fixed costs are allocated based long-run
average usage.
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A Behavioral Problem
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The New Manufacturing Environment
More accurate cost tracing systemsreduce the
need for allocationof indirect costs.
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The Rise of Activity-Based Costing
First stage allocations are toactivities, not
departments.
Service Department (Cafeteria)
ActivityOne
Service Department (Accounting)
The Product
ActivityTwo
Service Department (Personnel)
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Joint Product Cost Allocation
Product
Joint Product Costs
Product
Product
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Joint Product Cost Allocation

• Concept
• In some industries, a number of products are
  produced from a single raw material input.
• Key terms
• Joint products products resulting from a
  process with a common input.
• Split-off point the stage of processing where
  joint products are separated.
• Joint product cost costs of processing joint
  products prior to the split-off point.

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Joint Product Cost Allocation
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Joint Product Cost Allocation
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Allocating Joint Costs
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Allocating Joint Costs
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Allocating Joint Costs
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Physical-Units Method
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Physical-Units Method
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Physical-Units Method
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Physical-Units Method
225,000 joint conversion cost plus275,000
joint material cost
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Relative-Sales-Value Method
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Relative-Sales-Value Method
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Relative-Sales-Value Method
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Relative-Sales-Value Method
225,000 joint conversion cost plus275,000
joint material cost
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Net-Realizable-Value Method

• If products require further processing beyond
  the split-off point before they are marketable,
  it may be necessary to estimate the net
  realizable value (NRV) at the split-off point.

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Net-Realizable-Value Method
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Net-Realizable-Value Method
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Net-Realizable-Value Method
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Net-Realizable-Value Method
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Net-Realizable-Value Method
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By-Products
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By-Products

• Two commonly used methods of accounting for
  by-products are . . .
• By-product NRV is deducted from cost of joint
  process before allocation.
• By-product NRV isdeducted from cost of main
  product.

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End of Chapter 18