ACG 4361

Chapter 15: Allocating Support Costs

This handout is to be used in conjunction with the Chapter 15 PowerPoint.

Example 1: Dual Rate System

The Maintenance Dept is a support department. Its budget shows FC of $40,000 for 2018
and VC of $1.50/machine hour serviced.

There are two operating departments that use Maintenance services: Cutting and Grinding.
In the long run,
Cutting Dept. expects to use 9,000 mach. hrs/yr
Grinding Dept. expects to use 9,000 mach. hrs/yr

For 2018, the operating departments’ actual activity was:

Cutting Dept. actually used 7,000 mach. hrs
Grinding Dept. actually used 8,000 mach. hrs

The actual Maintenance Dept. Costs for 2018 were:

Fixed Costs $35,000
Variable Costs 24,000

Example 1 Solution
For VC, we allocate using the budgeted rate x actual usage of the driver since VC are really
related to the driver. The allocation is:

Variable Costs

Act. Use x Bud. Rate

cutting 7,000 x 1.50 = 10,500
grinding 8,000 x 1.50 = 12,000
total 22,500
Allocate FC using the budgeted numbers: budgeted rate and budgeted usage. This is because
FC are related to capacity, and so should be allocated based on long-run planned machine
hours.

Fixed Costs

Fixed Total Bud.

Cost Bud. Hrs. Hrs.
cutting 40,000 / 18,000 x 9,000 = 20,000
grinding 40,000 / 18,000 x 9,000 = 20,000
total 40,000

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Example 2A: Multiple Support Departments—Direct Method

The direct method allocates each support department costs to operating departments only.

Budgeted Data:
Support Departments Operating Depts
Janitor Personnel Mixing Canning
VC or VMOH $100,000 $60,000 $130,000 $170,000
base: sq ft 6,000 8,000 12,000 10,000
base: employees 25 5 10 20

Assume that the budgeted number of square footage and budgeted

number of employees equal the actual for each, respectively.

janitor  mixing and canning

personnel  mixing and canning
[DRAW DIAGRAM]

Mixing Canning
$130,000 $170,000
204,545 255,455
divide by base = VOH rate

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Example 2B: Multiple Support Departments—Step-Down Method

The Step Down (sequential) method partially recognizes the mutual service provided among
support departments.

Budgeted Data:
Support Departments Operating Depts
Janitor Personnel Mixing Canning
VC or VMOH $100,000 $60,000 $130,000 $170,000
base: sq ft 6,000 8,000 12,000 10,000
base: employees 25 5 10 20

Assume that the budgeted number of square footage and budgeted

number of employees equal the actual for each, respectively.

Determining which support department to allocated first:

 A common technique is to start with service dept. that serves the most other service
departments. (Here they are the same).
 Next, greatest % of its service to other service depts.
 For purposes of this course you will be told which support department to allocate first.
For this example, let’s allocate Personnel first.

Janitor Mixing Canning

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Example 2C: Multiple Support Departments—Reciprocal Method

The Reciprocal method fully recognizes the mutual services provided among all service
departments.

Budgeted Data:
Support Departments Operating Depts
Janitor Personnel Mixing Canning
VC or VMOH $100,000 $60,000 $130,000 $170,000
base: sq ft 6,000 8,000 12,000 10,000
base: employees 25 5 10 20

Assume that the budgeted number of square footage and budgeted

number of employees equal the actual for each, respectively.
[DRAW D
The reciprocal method uses simultaneous linear equations. You need to know how to setup the
equations, but you will not need to solve the equations. (There is also a second method, but we
won’t learn it in this class).

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Another type of cost we need to allocate are called common costs
 Costs of something like a building or machine shared by 2 or more users.
 Very difficult to allocate because no cause and effect.
 Example: Ordering small pizza costing $6 when you meet a friend who is ordering a
medium for $8. You decide to instead buy a large for $10. How should you split the
$10?
Stand alone - here just prorate cost in proportion to your stand alone costs.
_______________________________ for you
_______________________________ for your friend

Incremental - need to choose the primary user of the good. Say you decide that you are
the primary eater. Then you get the regular cost of ____ and your friend pays only the
incremental cost of _____ as the first incremental user. (If friend primary, they pay
_____, you pay _____).

Shapley Value – combination of incremental and primary user costs