CHAPTER 6

Support Department Cost Allocation

LEARNI NG OBJECTI VES
After studying this chapter, you should be able to:
1. Describe the difference between support departments and producing departments.
2. Explain five reasons why support costs may be assigned to producing departments.
3. Calculate charging rates, and distinguish between single and dual charging rates.
4. Allocate support center costs to producing departments using the direct method, the
seuential method, and the reciprocal method.
5. Calculate departmental overhead rates.
CHAPTER SUMMARY
!his chapter first differentiates support departments from producing departments. !he costs of
support departments are common to all producing departments and must be allocated to them to
satisfy many important ob"ectives. #iven that the causal factors can differ for fixed and variable
costs, a dual rate charging method is preferred to allocate the variable and fixed costs
separately. !hree methods are introduced to recogni$e various degrees of support department
interaction considered. %hile the direct method allocates support department costs only to the
producing departments, the seuential method and the reciprocal method allocate support
service costs among some &or all' interacting support departments before allocating costs to the
producing departments. (pon allocating all support department costs to producing departments,
an overhead rate can be computed for each producing department in order to determine the
product)s unit cost.
CHAPTER REVI EW
I. An Overview of Cost Allocation
Cost allocation is reuired to assign common resource costs to cost ob"ects or common
costs. Common costs occur when the same resource is used in the output of two or more
services or products.
Allocation is a means of dividing a pool of costs and assigning it to various subunits. !hus,
allocation does not affect the amount of total costs.
A. Cost allocation procedures include the following steps:
*. Departmentali$e the firm and classify each department as a support department or
a producing department.
125
+earning ,b"ective -*
126 Chapter 6
!here are two types of departments &cost ob"ects':
a. Producin departments are directly responsible for creating the products and
services sold to customers.
Examples: Assembly, .inishing
b. !upport departments provide essential support services for producing
departments.
Examples: /aintenance, 0uman 1esources, cafeteria
Review textbook Exhibit 6-1, which gives examples of producing and
support departments for a manufacturing firm and a service firm.
2. !race all overhead costs to a support or producing department.
!he costs that are directly associated with the individual departments will be traced
to one, and only one, department.
3. Allocate support department costs to producing departments.
!he support department costs are part of the total product costs and must be
assigned to the products through cost allocation from support departments to
producing departments.
4. Calculate predetermined overhead rates for producing departments.
5. Allocate overhead costs to the units of individual product through the
predetermined overhead rates.
Summary of support department cost allocation:
Support department cost assignment is a two6stage process:
Allocation of support department costs to producing departments.
Assignment of these allocated costs to individual products using departmental
overhead rates.
Support department costs cannot be allocated directly to units produced because:
7roducts do not pass through the support departments.
Support departments exist to support manufacturing activities within the
producing departments.
8. !ypes of Allocation 8ases
*. !he use of causal factors &activity drivers' is best for allocation of support
department costs.
Causal factors are variables or activities within a producing department that
provo9e the incurrence of support costs. !hus, using causal factors will result in
more accurate product costs and more control of the consumption of services.
2. !he use of a proxy is an alternative when an easily measured causal factor cannot
be found.
!he choice of a good proxy to guide allocation depends on the firm)s ob"ectives for
allocation.
Support Department Cost Allocation 12"
Review textbook Exhibit 6-3, which gives examples
of possible activit drivers for allocating support department costs.
II. O#$ectives of Allocation
A. !he :nstitute of /anagement Accountants &:/A' has identified the following ma"or ob"ec6
tives of support department cost allocation.
*. !o obtain a mutually agreeable price.
Accurate cost allocation helps a firm create meaningful and competitive bids.
2. !o compute product6line profitability.
1eliable product cost information helps a firm ensure that all products are profitable.
3. !o predict the economic effects of planning and control.
Accurate cost allocation helps a firm assess the profitability of various support
services and determine the appropriate mix of support services offered by the firm.
4. !o value inventory.
All manufacturing costs, direct and indirect, must be assigned to the products
produced to meet #AA7 reuirements.
5. !o motivate managers.
Allocation of support department costs:
0elps each producing department select the appropriate level of support
service consumption.
Encourages support department managers to be more sensitive to the needs
of the producing departments.
8. !he guidelines for determining the best allocation method are as follows:
*. !ause and effect ;Causal factors should be used to guide the allocations.
2. "enefits received;Cost should be allocated based on the perceived benefits.
3. #airness or e$uit &especially in government contracts';Cost allocation for a
government contract should be similar to that for a nongovernment contract.
4. %bilit to bear;!he more profitable the department, the larger the allocation,
regardless of whether or not there is any relationship or usage. !his is the least
desirable guideline because it provides no motivational benefits.
5. !ost-benefit ;!he cost of implementing an allocation scheme should result in
some benefit.
III. Allocatin One %epartment&s Costs to Another %epartment
Support department costs are allocated through the use of a charging rate. Considerations
that go into determining an appropriate charging rate include &*' the choice of a single or a
dual rate and &2' the use of budgeted versus actual support department costs.
A. A Single Charging 1ate
+earning ,b"ective -2
+earning ,b"ective -3
12' Chapter 6
*. 8oth fixed and variable costs are combined into a single rate. !he amount of
service cost allocated is solely a function of usage<volume.
2. !he use of a single rate treats the fixed cost as if it were variable. :t ignores the dif 6
ferential impact of changes in usage on costs. .ixed costs do not vary with the
level of services.
8. Dual Charging 1ates
!wo separate rates, one for fixed cost and one for variable cost, are used to avoid the
treatment of fixed costs as variable. !he variable rate is used in con"unction with the
fixed amount allocated to determine the total charge.
*. Developing a .ixed 1ate
.ixed service costs can be considered capacity costs because when the support
department was established, its delivery capacity was designed to serve the
long6term needs of the producing departments.
Support department fixed costs can be allocated using a three6step procedure:
a. Determination of budgeted fixed support service costs.
b. Computation of the allocation ratio:
Allocation ratio (
capacit) *otal
capacit) department Producin
c. Allocation:
Allocation ( Allocation ratio + ,udeted fi-ed support service costs
2. Developing a =ariable 1ate
>eed to identify the appropriate cost driver.
!he benefits of dual charging rates include the following:
.ixed costs are allocated to producing departments according to their original needs
of support capacity.
=ariable costs are allocated to producing departments based on their usage of the
support department service.
C. 8udgeted versus Actual (sage
*. (se the budgeted usage as the allocation base when fixed costs are involved.
2. Allocation of budgeted support service costs is better than allocation of actual
support service costs because allocating actual costs passes on the efficiencies or
inefficiencies of the service department, something that the manager of the
producing department cannot control.
3. Support department cost allocation for product costing is calculated as follows:
Cost allocated #ased on dual rate method (
.*otal #udeted fi-ed cost + Allocation ratio/
0 .,udeted unit varia#le cost + ,udeted activit) level/
4. Support department cost allocation for performance evaluation is calculated as
follows:
Cost allocated #ased on dual rate method (
.*otal #udeted fi-ed cost + Allocation ratio/
0 .,udeted unit varia#le cost + Actual activit) level/
D. .ixed versus =ariable 8ases: A >ote of Caution
Support Department Cost Allocation 121
*. (se the normal or practical capacity to allocate fixed support department costs
as long as the capacity demands from the producing departments remain at the
level originally anticipated.
2. >ote that allocation of fixed costs based on actual usage will allow the actions of
one department to affect the amount of cost allocated to another department.
Review textbook Exhibit 6-&, which shows the use of budgeted usage for product costing.
Review textbook Exhibit 6-', which illustrates the
use of actual usage for performance evaluation.
(ote that the difference between the results of single-rate and dual-rate cost allocation
derives from different activit levels used for allocating variable cost for different purposes.
I2. Choosin a !upport %epartment Cost Allocation 3ethod
/any companies have multiple support departments, and they freuently interact. !hese
interactions among support departments need to be considered to produce accurate cost
assignments.
!hree methods can be used to allocate support department costs: the direct, seuential,
and reciprocal methods. :n determining which support department cost allocation method
to use, companies must:
Determine the extent of support department interaction.
%eigh the costs and benefits associated with each method.
A. Direct /ethod of Allocation
%hen support department costs are allocated only to the producing departments, the
direct method of allocation is being used. !his is the most simple and straightforward
of the three allocation methods. (nder this method,
>o support department costs are allocated to any other support department.
All interactions between the support departments are ignored.
Review textbook Exhibit 6-6, which illustrates the direct method of allocation.
Review textbook Exhibit 6-), which provides a numeric example of direct allocation.
8. Seuential /ethod of Allocation
!he se4uential .or step/ method of allocation recogni$es that interactions among sup6
port departments do occur.
*. Cost allocations are performed in a step6down fashion.
a. !he costs of the support department rendering the greatest service are allocated
first.
b. ,nce a support department)s costs have been allocated, no costs are
allocated bac9 to it.
+earning ,b"ective -4
135 Chapter 6
c. !he costs allocated from a support department are its direct costs plus any costs
it receives in allocations from other support departments.
2. Seuential allocation may be more accurate than the direct method because it
recogni$es some interactions among the support departments.
:ts disadvantage, however, is that it does not recogni$e all of the interactions
between support departments.
Review textbook Exhibit 6-*, which illustrates the se$uential method of allocation.
Review textbook Exhibit 6-1+, which provides a numeric example of se$uential allocation.
C. 1eciprocal /ethod of Allocation
:n the reciprocal method of allocation, all of the interactions between support
departments are recogni$ed by its reciprocity on cost allocation.
*. !he total cost of a support department is the sum of its direct costs plus the
proportion of service received from other support departments. !he total cost
reflects interactions among the support departments.
*otal cost ( %irect costs 0 Allocated costs
2. A series of simultaneous linear euations must be constructed and solved to
perform reciprocal cost allocation.
Review textbook Exhibit 6-11, which illustrates the reciprocal method of
allocation and the proportion of support output consumed b all users.
Review textbook Exhibit 6-1,, which provides a numeric example of reciprocal allocation.
D. Comparison of the !hree /ethods
*. !he advantages of better allocation must outweigh the increased cost of using a
more theoretically preferred method.
2. 1apid changes in technology ma9e allocation unnecessary. .or example, there is
no need for support department cost allocation in the ?:! environment because the
manufacturing cells &i.e., producing departments' are performing many support
functions.
2. %epartmental Overhead 6ates and Product Costin

(pon allocating all support department costs to producing departments, an overhead rate
can be computed for each producing department to assign costs to products.
%epartmental overhead rates (
department producin of #ase activit) ,udeted
department support of costs Allocated 0 department producin of costs overhead %irect
!he accuracy of the product costs depends primarily on the accuracy of the assignment
of the overhead costs because material and labor are directly traceable to products.
#reat care should be used in identifying and using causal factors for both stages of
overhead assignment. !his, in turn, depends upon
+earning ,b"ective -5
Support Department Cost Allocation 131
the strength of correlation among the factors used to allocate support costs to the
department and
the strength of correlation among the factors used to allocate the producing
department)s overhead costs to the products.
132 Chapter 6
KEY TERMS TEST
From the list that follows, select the term that best completes each statement and write it in the
space provided.
causal factors
common cost
direct method
producing department
reciprocal method
seuential &or step' method
support department
1. !he method that allocates service costs to producing departments without considering inter6
actions that may exist among the support departments is the @@@@@@@@@@@@@@@@@@
@@@@@@@@@@@@@.
2. @@@@@@@@@@@@@@@@@@@@@@@ is the cost of a resource used in the output of two or more ser 6
vices or products.
3. !he method that allocates service costs to user departments giving partial consideration to
interactions among the support departments is the @@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@.
4. !he method that simultaneously allocates service costs to all user departments is the
@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@.
5. @@@@@@@@@@@@@@@@@@@@@@@@@ are variables or activities within a producing department that
provo9e the incurrence of support costs.
6. !he @@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@ is responsible for producing the products
or services that are sold to customers.
". !he @@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@ provides essential support to producing
departments.
MULTI PLE- CHOI CE QUI Z
Complete each of the following statements by circling the letter of the best answer.
1. %hich of the following departments would be classified as a support departmentA
a. .abricating
#. Assembly
c. Engineering
d. .inishing
e. #rinding
2. %hich of the following departments would be classified as a producing departmentA
a. Engineering
#. /achining
c. .inal :nspection
d. /aintenance
e. Scheduling
Support Department Cost Allocation 133
3. %hich of the following best describes the two6stage allocation processA
a. Costs are first traced to support departments, then costs are allocated to units.
#. Costs are first allocated to producing departments, then costs are traced to
support departments.
c. Costs are first allocated to support departments, then costs are allocated to products.
d. Costs are first allocated to producing departments, then costs are allocated to products.
e. Costs are first allocated to products, then costs are allocated to services.
4. %hich of the following statements regarding allocation bases is correctA
a. Causal factors will introduce inaccuracies in the product costsB they should never be used.
#. Support departments will never have good proxies, thus a causal factor must be used.
c. Support departments will never have causal factors, thus a proxy must be used.
d. :f possible, a good proxy should be used as the allocation base.
e. :f possible, causal factors should be used as the allocation base.
5. %hich of the following is not an ob"ective of allocation, as identified by the :/AA
a. !o provide an estimate of cost drivers.
#. !o obtain a mutually agreeable price.
c. !o compute product6line profitability.
d. !o predict the economic effects of planning and control.
e. All of the above are ob"ectives of allocation.
6. %hich of the following statements regarding the allocation of support department costs
is correctA
a. A single charging rate will provide producing department managers with an accurate
assessment of fixed and variable costs.
#. A dual charging rate leads the producing department managers to treat all costs as
variable.
c. !he ability to bear is the best guideline to follow in choosing an allocation method.
d. A dual charging rate leads the producing department managers to treat all costs as fixed.
e. A dual charging rate will provide producing department managers with an accurate
assessment of fixed and variable costs.
". %hen a dual charging rate is used to allocate fixed costs, which of the following should be
used to measure the capacityA
a. normal activity of the support department
#. normal activity of the producing department
c. pea9 activity of the support department
d. actual activity of the producing department
e. actual activity of the support department
134 Chapter 6
'. %hich of the following is not a reason for using the budgeted support department costs in
preparing the allocation ratesA
a. ,nly budgeted support department costs can be bro9en down into fixed and variable costs.
#. Since the support department allocation is preliminary to determining the overhead rate
at the beginning of the period, actual costs are not yet 9nown.
c. Since support department allocations are used for performance evaluation, the budget is
used to enable comparisons with actual results.
d. 7roducing department managers have no control over the support department spendingB
the efficiencies or inefficiencies should not be passed on to the producing department.
e. All of the above are reasons for using budgeted support department costs rather than
actual costs.
Use the following information for Questions 9 and 10
A8C Company has two support departments &7ower and /aintenance' and two producing
departments &Assembly and .inishing'. !he direct allocation method is used to assign support
department costs to the producing departments. !he causal factor for the power costs is 9ilowatt
hoursB the causal factor for the maintenance costs is repair hours. Assume the following
information:
Power 3aintenance Assem#l) 7inishin
Direct costs..................... C*DD,DDD C*5D,DDD CE5,DDD C5D,DDD
Filowatt hours.................. *D,DDD GD,DDD *DD,DDD
1epair hours.................... 5DD 2,5DD 2,DDD
1. %hat would be the 7ower Department allocation to the Assembly DepartmentA
a. C45,DDD
#. C4E,3HI
c. C5D,DDD
d. C54,4E4
e. CI2,IG5
15. %hat would be the /aintenance Department allocation to the .inishing DepartmentA
a. C2D,DDD
#. C22,222
c. CHD,DDD
d. CHH,HHE
e. CE*,***
Use the following information for Questions 11 and 1!
!riad Company has two support departments &?anitorial and 7ayroll' and two producing
departments &Assembly and .inishing'. !he seuential allocation method is used to assign
support department costs to the producing departments. 7ayroll costs are allocated first. A proxy
for "anitorial services is suare footageB a proxy for payroll is number of employees. Assume the
following information:
8anitorial Pa)roll Assem#l) 7inishin
Direct costs..................... C25D,DDD C2E5,DDD
Suare feet..................... 5DD 3,5DD *,5DD
>umber of employees..... 5 I *25 *DD
Support Department Cost Allocation 135
11. %hat would be the 7ayroll Department allocation to the Assembly DepartmentA
a. C*44,433
#. C*4G,45E
c. C*52,EEI
d. C*E2,H3G
e. none of the above
12. %hat would be the ?anitorial Department allocation to the .inishing DepartmentA
a. CHI,*I2
#. CHG,I*2
c. CE5,DDD
d. CEH,EG3
e. none of the above
Use the following information for Questions 1" and 1#
/J7 !ool has three service departments that support the production area. ,utlined below is the
estimated overhead by department for the upcoming year:
9stimated Overhead :um#er of 9mplo)ees
Service Departments:
1eceiving................. C25,DDD 2
1epair...................... 35,DDD 2
!ool......................... *D,DDD *
7roduction Departments:
Assembly................. 25
8olting..................... *2
!he 1epair Department supports the greatest number of departments, followed by the !ool
Department. ,verhead cost is allocated to departments based on the number of employees.
13. (sing the direct method of allocation, how much of the 1epair Department)s overhead will
be allocated to the !ool DepartmentA
a. CD
#. CIE5
c. CE,DDD
d. C**,HHE
e. C*4,DDD
14. (sing the seuential method of allocation, what would be the allocation from the 1epair
Department to the !ool DepartmentA
a. CD
#. CIE5
c. CE,DDD
d. C**,HHE
e. C*4,DDD
136 Chapter 6
PRACTI CE TEST
9;96CI!9 1
Classify each of the following departments in a factory as a producing department or a support
department by placing a chec9 mar9 in the appropriate column.
Producin %epartment !upport %epartment
1. .abricating
2. Accounting
3. /achining
4. .inishing
5. 1ewor9
6. Cafeteria
". /aintenance
'. #rinding
1. 0eat treat
15. Cutting
11. /aterials storeroom
12. 7urchasing
13. Assembly
14. Engineering
15. %elding
Support Department Cost Allocation 13"
9;96CI!9 2
Apex Corporation has decided to revise the allocation approach for its .inancial Analysis Depart6
ment. !he new approach is to develop a charging rate based on the number of special
reports reuested. Each of the reports ta9es roughly the same resources, time, and supplies, so
the number of reports is an adeuate proxy of the activity of the department. .ixed costs for the
department total C*D,DDD per monthB variable costs are C*5 per report. !he estimated activity
for the various departments has been forecasted to be as follows:
%epartment 9stimated 6eports
Scheduling.................................... 5
Accounting.................................... 25
.inance......................................... 2D
Data 7rocessing........................... *5
Engineering................................... 25
+egal............................................. *D
After the new allocation system had been in place for six months, the following average
monthly activity was observed:
%epartment Actual 6eports
Scheduling.................................... *D
Accounting.................................... 25
.inance......................................... 45
Data 7rocessing........................... *5
Engineering................................... 3D
+egal............................................. 25
$e%uired
1. Calculate a single charging rate, on a per report basis, to be charged to the departments.
8ased on the departments) actual number of reports, how much would be charged to each
department using the single charging rateA
13' Chapter 6
9;96CI!9 2 &Continued'
2. Calculate a dual charging rate. 8ased on the departments) actual number of reports, how much
would be charged to each department using the dual charging rateA
3. %hich departments would prefer the single charging rateA %hyA %hich would prefer the
dual charging rate, and whyA
Support Department Cost Allocation 131
9;96CI!9 3
!riad Company)s legal department serves as an internal patent consulting service. !he department
has fixed salaries of C3D,DDD per month. 7atent searches cost C5D per hour of connect time with
the on6line databases. All other costs of the department are fixed, totaling C*5,DDD per month.
!he two research laboratories of !riad, /emphis and Columbus, are currently the only users of the
service. >ormal usage has averaged *E5 hours of connect time for the /emphis lab and 225
hours for the Columbus lab.
$e%uired
1. Determine the amount of legal service costs that should be assigned to each lab using a single
charging rate.
2. Determine the amount of legal service costs that should be assigned to each lab using a dual
charging rate.
3. During ,ctober, the +egal Department had fixed costs totaling C4I,DDD and actual connect
time costs of C23,4DD. !he /emphis lab used *ID hours of connect timeB Columbus used 2ED
hours. Determine the amount of costs that should be assigned to each lab. &-int. (se good
principles of performance evaluation.'
145 Chapter 6
9;96CI!9 4
K1S Company has two support departments &Administration and ?anitorial' and three producing
departments &.abricating, Assembly, and .inishing'. Costs and activities are as follows:
Administration 8anitorial 7a#ricatin Assem#l) 7inishin
Direct costs....................... C5D,DDD C3D,DDD C4D,DDD C5D,DDD C25,DDD
>umber of employees....... *D 3D 4D 2D
Suare feet....................... 2,DDD *D,DDD 2I,DDD *5,DDD
Direct labor hours.............. 5,DDD H,DDD 2,DDD
Administrative services are allocated based on the number of employeesB "anitorial services are
allocated based on suare footage. ,verhead rates for the three producing departments are based
on direct labor hours.
$e%uired
Determine the overhead application rates for the producing departments using each of the three
allocation methods:
1. Direct allocation method for the support departments
Support Department Cost Allocation 141
9;96CI!9 4 &Continued'
2. Seuential allocation method for the support departments
3. 1eciprocal allocation method for the support departments
142 Chapter 6
9;96CI!9 4 &Continued'
/se this space to continue our answer.
Support Department Cost Allocation 143
CAN YOU? CHECKLI ST
Can you describe the difference between a producing department and a support departmentA
Can you explain why the distinction is importantA
Can you describe the steps to ta9e to allocate support department costsA
Can you explain the various ob"ectives of allocating support department costsA :n other
words, why are support costs allocatedA
Can you explain the difference between a single charging rate and a dual charging rateA Can
you explain when actual usage or budgeted usage should be usedA Can you explain why the
method used may affect the producing department manager)s view of the cost behaviorA
Can you allocate support department costs using the direct methodA !he seuential methodA
!he reciprocal methodA Can you explain how each method treats the interactions among
support departmentsA
ANSWERS
<9= *963! *9!*
1. direct method
2. Common cost
3. seuential &or step' method
4. reciprocal method
5. Causal factors
6. producing department
". support department
3>?*IP?9@CAOIC9 B>IC
1. c
2. b
3. d
4. c
5. a
6. e
". b
'. a
1. b C*DD,DDD L GD,DDD < &GD,DDD M *DD,DDD' N C4E,3HI
15. d C*5D,DDD L 2,DDD < &2,DDD M 2,5DD' N CHH,HHE
11. b C2E5,DDD L *25 < &5 M *25 M *DD' N C*4G,45E
12. d C25D,DDD M &C2E5,DDD L 5' < &5 M *25 M *DD' L *,5DD < &3,5DD M *,5DD' N
C255,GEI L *,5DD < 5,DDD N CEH,EG3
13. a !he direct method does not allocate support department)s cost to other support
departments.
14. b !he 1epair Department performs allocation first. !hus, the !ool Department will
receive cost allocation of &C35,DDD L *<4D' N CIE5.
144 Chapter 6
P6AC*IC9 *9!*
9;96CI!9 1
Producin %epartment !upport %epartment
1. .abricating
2. Accounting
3. /achining
4. .inishing
5. 1ewor9
6. Cafeteria
". /aintenance
'. #rinding
1. 0eat treat
15. Cutting
11. /aterials storeroom
12. 7urchasing
13. Assembly
14. Engineering
15. %elding
9;96CI!9 2
.Ape- Corporation/
1. Single charging rate N &C*D,DDD < *DD' M C*5 N C**5
%epartment 6eports 6ate *otal
Scheduling.............................. *D C**5 C *,*5D
Accounting............................. 25 **5 2,IE5
.inance................................... 45 **5 5,*E5
Data 7rocessing..................... *5 **5 *,E25
Engineering............................ 3D **5 3,45D
+egal ...................................... 25 **5 2,IE5
C*E,25D
2. Dual charging rate: =ariable rate N C*5B .ixed charge as follows:
Capacit) 7i-ed Cost
%epartment 6eports Percent Allocated
Scheduling.............................. 5 5 C 5DD
Accounting............................. 25 25 2,5DD
.inance................................... 2D 2D 2,DDD
Data 7rocessing..................... *5 *5 *,5DD
Engineering............................ 25 25 2,5DD
+egal ...................................... *D *D *,DDD
*DD C*D,DDD
2DOA 2DOA 7i-ed Cost
%epartment 6eports 6ate Costs Allocated *otal
Scheduling.............................. *D C*5 C *5D C 5DD C H5D
Accounting............................. 25 *5 3E5 2,5DD 2,IE5
.inance................................... 45 *5 HE5 2,DDD 2,HE5
Data 7rocessing..................... *5 *5 225 *,5DD *,E25
Engineering............................ 3D *5 45D 2,5DD 2,G5D
+egal ...................................... 25 *5 3E5 *,DDD *,3E5
C2,25D C*D,DDD C*2,25D
3. !he only time a department will prefer a single charging rate is when the actual usage is less than the expected
usage. %hen actual usage euals expected usage, a single charging rate will eual a dual charging rate. :f actual
usage is greater than expected, the department will be charged a larger amount due to fixed costs.
Support Department Cost Allocation 145
9;96CI!9 3 .
*riad Compan)
/
1. Single charging rate N O&C3D,DDD M C*5,DDD' < &*E5 M 225'P M C5D
Single charging rate N &C45,DDD < 4DD' M C5D N C*H2.5D
,verhead cost allocated to /emphis: *E5 hours L C*H2.5D N C2I,43E.5D
,verhead cost allocated to Columbus: 225 hours L C*H2.5D N C3H,5H2.5D
2. Dual charging rate: =ariable charge N C5D hour
/emphis *E5 hours N 43.E5Q of total hours
.ixed cost: C45,DDD L D.43E5 N C*G,HIE.5D
,verhead cost allocated: C*G,HIE.5D fixed M &C5D L *E5 hours' N C2I,43E.5D
Columbus 225 hours N 5H.25Q of total hours
.ixed cost: C45,DDD L D.5H25 N C25,3*2.5D
,verhead cost allocated: C25,3*2.5D fixed M &C5D L 225 hours' N C3H,5H2.5D
3. /emphis: C*G,HIE.5D M &C5D L *ID hours' NC*G,HIE.5D M C G,DDD N C2I,HIE.5D
Columbus: C25,3*2.5D M &C5D L 2ED hours' N 25,3*2.5D M *3,5DD N 3I,I*2.5D
C45,DDD.DD M C22,5DD N CHE,5DD.DD
#ood principles of performance evaluation will use the budgeted rates for the allocation rather than the actual
rates. !he inefficiencies in the +egal Department &C3,DDD over6budget fixed costs and CGDD over6budget variable
costs' are not allocated to the users.
9;96CI!9 4 .
B6! Compan)
/
1. Direct /ethod
7a#ricatin Assem#l) 7inishin *otal
>o. of employees.............................. 3D 4D 2D GD
Service percentage...................... 33.33Q 44.44Q 22.22Q *DD.DDQ
Suare feet....................................... *D,DDD 2I,DDD *5,DDD 53,DDD
Service percentage...................... *I.IEQ 52.I3Q 2I.3DQ *DD.DDQ
Administrative cost allocationR......... C*H,HHH.HE C22,222.22 C**,***.** C5D,DDD.DD
?anitorial cost allocationRR................ 5,HHD.3I *5,I4G.DH I,4GD.5E 3D,DDD.DD
Direct overhead cost......................... 4D,DDD.DD 5D,DDD.DD 25,DDD.DD
!otal overhead cost.......................... CH2,32E.D5 CII,DE*.2I C44,HD*.HI
Divided by direct labor hours........... S 5,DDD S H,DDD S 2,DDD
Departmental ,0 rate per D+0........ C *2.4E C *4.HI C 22.3D
RRDepartmental employee Q L C5D,DDD
RRDepartmental suare feet Q L C3D,DDD
146 Chapter 6
2. Seuential /ethod
As indicated in the service proportion table, the Administration Department provides the highest percentage of
service to other service departments. !hus, the administrative costs will be allocated first, then followed by the
?anitorial Department cost allocation.
!ervice Proportion *a#le
Admin. 8anitorial 7a#ricatin Assem#l) 7inishin *otal
>o. of employees.................................. *D 3D 4D 2D *DD
Service percentage.......................... *D.DDQ 3D.DDQ 4D.DDQ 2D.DDQ *DD.DDQ
Suare feet........................................... 2,DDD *D,DDD 2I,DDD *5,DDD 55,DDD
Service percentage.......................... 3.H4Q *I.*IQ 5D.G*Q 2E.2EQ *DD.DDQ
!e4uential Cost Allocation
Admin. 8anitorial 7a#ricatin Assem#l) 7inishin *otal
Direct overhead cost............................. C 5D,DDD' C3D,DDD' C4D,DDD C5D,DDD C25,DDD
.irst step: Allocate admin. costs......... C&5D,DDD' C 5,DDD' C*5,DDD C2D,DDD C*D,DDD
Second step: Allocate "anitorial costs
Determine allocation percentages:
Suare feet.................................. *D,DDD 2I,DDD *5,DDD 53,DDD
Allocation percentage................. *I.IEQ 52.I3Q 2I.3DQ *DD.DDQ
?anitorial cost allocation.................. C&35,DDD' CH,HD4 C*I,4G* CG,GDH C35,DDD
!otal overhead costs............................ CD' CD' CH*,HD4 CII,4G* C44,GDH
Divided by direct labor hours................ S 5,DDD S H,DDD S 2,DDD
Departmental ,0 rate per D+0............ C *2.32 C *4.E5 C 22.45
3. 1eciprocal /ethod
!ervice Proportion *a#le
Admin. 8anitorial 7a#ricatin Assem#l) 7inishin *otal
>o. of employees.................................. *D 3D 4D 2D *DD
Service percentage.......................... *D.DDQ 3D.DDQ 4D.DDQ 2D.DDQ *DD.DDQ
Suare feet........................................... 2,DDD *D,DDD 2I,DDD *5,DDD 55,DDD
Service percentage.......................... 3.H4Q *I.*IQ 5D.G*Q 2E.2EQ *DD.DDQ
Simultaneous euations can be created based on the service proportion table above.
A N C5D,DDD M.D3H4? ? N C3D,DDD M D.*A
where A N Administration Department total costs
? N ?anitorial Department total costs
A N C5D,DDD M .D3H4 L &C3D,DDD M D.*A'
A N C5D,DDD M C*,DG2 M D.DD3H4A ? N C3D,DDD M &D.* L C5*,2EG'
D.GGH3HA N C5*,DG2 ? N C3D,DDD M C5,*2I
A N C5*,2EG ? N C35,*2I
6eciprocal Cost Allocation
Admin. 8anitorial 7a#ricatin Assem#l) 7inishin
Direct overhead cost............................. C5D,DDD.DD' C3D,DDD.DD' C4D,DDD.DD C5D,DDD.DD C25,DDD.DD
Administrative cost allocation.............. &5*,2EG.DD' 5,*2E.GD' *5,3I3.ED 2D,5**.HD *D,255.ID
?anitorial cost allocation....................... *,2EE.3I ' &35,*2I.DD' H,3IH.G* *E,II3.35 G,5ID.3H
!otal overhead costs............................ C D' C D' CH*,EED.H* CII,3G4.G5 C44,I3H.*H
Direct labor hours................................. S 5,DDD S H,DDD S 2,DDD
Departmental overhead rate................. C *2.35 C *4.E3 C 22.42