Slide Chương 3 KTQTNC

9/21/2021
Chapter 3
Support Department Cost

Allocation
Learning Objectives
• Obj. 1: Describe support departments and support

department costs.
• Obj. 2: Describe the allocation of support
department costs using a single plantwide rate,
multiple department rates, and activity-based
costing.
• Obj. 3: Allocate support department costs to
production departments using the direct method,
sequential method, and reciprocal services method.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Support Departments (slide 1 of 3)
• A support department provides a necessary

service to produce a product, but is not directly
involved in the production process.
o For example, Janitorial and Maintenance departments
are necessary for production, but are not directly
involved in production.
• Support departments are sometimes called service
departments because they provide services to
other departments.
• Support departments are normally accounted for as
a cost or responsibility center. All direct costs of the
support department are accumulated in the center.
• Because support department costs are only

indirectly related to production, they are difficult to
apply to products.
o However, it is difficult, if not impossible, to find an
appropriate cost driver for applying these costs to a
product.
• Some companies consider support department
costs to be facility-level costs and do not apply them
to products.
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o This approach ignores the fact that support

department services may be used more heavily by
some products than others, which can result in
inaccurate product costs.
▪ Hence, guidance for incorporating support department cost
allocation into a product costing system is provided in the
following slides.
Allocation of Overhead Costs
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Single Plantwide Rate (slide 1 of 2)
• When a single plantwide overhead rate is used to

apply overhead to products, support department
costs are simply combined with all other overhead
costs.
o The total overhead cost is then applied to the
products using a single cost driver.
• Because a single driver is used for all overhead
costs, it is unlikely that the driver selected is
appropriate for every type of overhead.
Single Plantwide Rate (slide 2 of 2)
o This method ignores the fact that the processes used

in manufacturing a product may differ from those
used for other products.
o As a result, using a single plantwide rate may result in
inaccurate product costs.
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Allocating Overhead Costs Using a Single

Plantwide Rate
Multiple Production Department Rates
• When multiple production department rates are

used to apply overhead to products, overhead costs
are first directly traced or distributed to support and
production departments.
o Support department costs are then allocated to
production departments based on the amount of
support activity used by each production department.
o After support department costs are allocated to the
production departments, production department costs
are then applied to the products using cost drivers for
each production department.
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Allocating Overhead Costs Using Multiple

Production Department Rates
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Activity-Based Costing (slide 1 of 2)
• When activity-based costing (ABC) is used to apply

overhead to products, support department costs are
referred to as support activity costs.
o The process for allocating support activity costs is
similar to that used with multiple production
department rates.
▪ Overhead costs are directly traced or distributed to
support and production activities.
▪ Support activity costs are allocated to production
activities.
▪ Production activity costs are applied to the products
using cost drivers for each production activity.
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Allocating Overhead Costs Using Activity-

Based Costing
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Activity-Based Costing (slide 2 of 2)
• The terms assign, distribute, apply, and allocate are

often used when referring to manufacturing costs
and the transfer of these costs to departments and
products.
o Transferring overhead costs to support and
production departments is referred to as distributing
overhead costs.
o Transferring costs to products is referred to as
applying costs to products or the application of costs.
o Allocating costs or cost allocation may be used in a
variety of ways.
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Allocating Support Department Costs

to Production Departments
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Steps of Support Department Cost Allocation
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The Direct Method
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Using the Direct Method – Decker Tables

(slide 1 of 6)
• Step 1 - The costs for each department are determined

by identifying costs that can be traced to a specific
department.
Janitorial Cafeteria Cutting Assembly
Department Department Department Department
Department
$310,000 $169,000 $1,504,000 $680,000
costs
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(slide 2 of 6)
• Step 2 - An appropriate cost driver is determined for

each support department.
o The more square footage that needs to be the cleaned, the
higher the Janitorial costs.
Support Department Cost Driver
Janitorial Department Square footage to be serviced
Cafeteria Department Number of employees
• Step 3 - The usage of the support department cost

drivers by each department is determined.
Janitorial Cafeteria Cutting Assembly
Cost Driver
Department Department Department Department
Square feet 50 5,000 1,000 4,000
Number of employees 10 3 30 10
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(slide 3 of 6)
• Step 4 - The percentage usage of support

department cost drivers by the production
departments is determined.
o Determining the percentage usage based on square
footage
1,000
Cutting Department: = 20% of Janitorial Services
1,000 + 4,000
4,000
Assembly Department: = 80% of Janitorial Services
1,000 + 4,000
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(slide 4 of 6)
o Determining the percentage based on the number of

employees
30
Cutting Department: = 75% of Janitorial Services
30 + 10
10
Assembly Department: = 25% of Cafeteria Services
30 + 10
• Step 5 - Support department costs are allocated

to the production departments by multiplying the
percentage usage of each production
department by the total support department
costs.
21

(slide 5 of 6)
Department Janitorial Department Costs

Cutting Department $ 62,000 ($310,000 × 20%)
Assembly Department 248,000 ($310,000 × 80%)
Total $310,000
• The Cafeteria costs of $126,750 are allocated

$161,250 to the Cutting Department and $42,250 to
the Assembly Department, as follows:
Department Cafeteria Department Costs
Cutting Department $126,750 ($169,000 × 75%)
Assembly Department 42,250 ($169,000 × 25%)
Total $169,000
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(slide 6 of 6)
• The support department costs are added to any

costs that were directly traced or distributed to
the production departments in Step 1.
o Thus, the total costs of the Cutting and Assembly
departments are as follows:
Cutting Department
$1,504,000 (from Step 1) + $62,000 (from Step 5) + $126,750 (from Step 5) = $1,692,750
Assembly Department
$680,000 (from Step 1) + $248,000 (from Step 5) + 42,250 (from Step 5) = $970,250
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Summary of Support Department Cost

Allocations Using the Direct Method
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Check Up Corner Direct Method of Support

Department Cost Allocation
• Support Department 1 has $200,000 in costs distributed to it. Costs from Support
Department 1 will be allocated to other departments based on labor hours.
Support Department 2 uses 50 labor hours from Support Department 1,
Production Department 1 uses 75 labor hours from Support Department 1, and
Production Department 2 uses 25 labor hours from Support Department 1.
o Using the direct method for support department cost allocation, how much of Support
Department 1’s costs will be allocated to Support Department 2?
Department 1’s costs will be allocated to Production Department 1?
Department 1’s costs will be allocated to Production Department 2?
25
Check Up Corner Direct Method of Support Department

Cost Allocation Solution (slide 1 of 2)
a. Because the direct method is used, all support department costs are allocated
directly to the production departments. None of Support Department 1’s costs
are allocated to Support Department 2.
b. Note that, because no costs are allocated from Support Department 1 to
Support Department 2, the number of Support Department 1 labor hours used
by Support Department 2 is irrelevant. Production Department 1 uses 75% of
Support Department 1’s labor hours (only considering the usage among
departments to which Support Department 1’s costs will be allocated),
computed as follows:
75
= 75%
75 + 25
o Costs are allocated from Support Department 1 to Production Department 1 by
multiplying the $200,000 Support Department 1 costs by Production Department 1’s
proportional usage of Support Department 1 labor hours. Thus, allocated costs are
$200,000 × 75% = $150,000.
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Check Up Corner Direct Method of Support Department

• Production Department 2 uses 25% of Support Department 1’s labor hours (only
considering the usage among departments to which Support Department 1’s costs
will be allocated), computed as follows:
25
= 25%
75 + 25
proportional usage of Support Department 1 labor hours. Thus, allocated costs are
$200,000 × 25% = $50,000.
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The Sequential Method or Step-Down Method
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The Sequential Method (slide 1 of 7)
• Under the sequential method, support department

costs are never allocated back to a support
department whose costs have already been
allocated.
o As a result, the sequential method captures some, but
not all, of the inter-support-department services.
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The Sequential Method – Allocation of Costs
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• There may be a conflict in the preceding factors.

o For example, the support department with the highest costs may
serve the fewest number of other support departments.
o As a result, managers often make subjective assessments about
the order of allocating support departments.
• Steps 1 to 3 of the sequential method are the same as
for the direct method.
Support Departments Production Departments
Specifics Janitorial Cafeteria Cutting Assembly
Square feet 50 5,000 1,000 4,000
Number of employees 10 3 30 10
Department costs $310,000 $169,000 $1,504,000 $680,000
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• In Step 4, the proportional usage of each

support department’s cost driver by the other
departments to which its costs are to be
allocated is determined.
o Assume that Decker Tables decides to allocate
Janitorial costs first, followed by Cafeteria costs.
Janitorial Department Usage

Department Square Feet Usage Percent
Cafeteria 5,000 50%
Cutting 1,000 10
Assembly 4,000 40
Totals 10,000 100%
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• The proportional usage of Cafeteria services by the

Cutting and Assembly departments is as follows:
Cafeteria Department Usage
Department Square Feet Usage Percent
Cafeteria 5,000 50%
Cutting 1,000 10
Assembly 4,000 40
Totals 10,000 100%
o The usage of the Cafeteria Department by the Janitorial
Department is not considered.
▪ This is because the Cafeteria Department costs are allocated after
the Janitorial Department.
o Once a support department’s costs are allocated under the sequential
method, it is not allocated any additional costs.
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• In Step 5, each support department’s costs are

allocated to other departments.
o The support department’s total costs are multiplied by
the proportional usage of the departments to which
costs are allocated.
• Under the sequential method, the total support
department costs to be allocated will also include
any costs that were allocated to that support
department from other support departments.
o This is a major difference between the sequential
method and the direct method.
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• To illustrate, the Janitorial Department’s costs of

$310,000 are allocated to the Cafeteria, Cutting, and
Assembly departments by multiplying $310,000 by
each department’s proportional usage, as follows:
Janitorial Department Usage Allocated

Department × =
Costs ($) Percent (%) Cost ($)
Cafeteria
$310,000 × 50% = $155,000
Department
Cutting ×
310,000 10 = 31,000
Department
Assembly ×
310,000 40 = 124,000
Department
Totals 100% $310,000
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• The total Cafeteria Department costs of $324,000

($169,000 + $155,000) are allocated to the Cutting
and Assembly departments as follows:
Cafeteria Department Usage Allocated

Department × =
Costs ($) Percent (%) Cost ($)
Cutting
$324,000 × 75% = $243,000
Department
Assembly ×
324,000 25 = 81,000
Department
Totals 100% $324,000
• The support department cost allocations using the

sequential method for Decker Tables are
summarized in the next slide.
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Summary of Support Department Cost

Allocations Using the Sequential Method
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Check Up Corner Sequential Method of Support

Department Cost Allocation (slide 1 of 2)
• Jupiter Enterprises LLC has two support departments and two production
departments. Support Department 1 has $500,000 in costs distributed to it. Costs
from Support Department 1 will be allocated to other departments based on
machine hours. Support Department 2 has $250,000 in costs distributed to it.
Costs from Support Department 2 will be allocated to other departments based on
square feet. Production Departments 1 and 2 have $1,000,000 and $1,200,000 in
costs distributed to them, respectively. Costs are allocated using the sequential
method, allocating Support Department 1 costs first.
o Departmental usage of cost drivers is summarized as follows:
Support Support Production Production

Specifics
Department 1 Department 2 Department 1 Department 2
Machines hours 200 1,000 10,000 14,000
Square feet 800 650 1,000 4,000
Department cost $500,000 $250,000 $1,000,000 $1,200,000
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Check Up Corner Sequential Method of Support

Department Cost Allocation (slide 2 of 2)
a. How much of Support Department 1’s costs will be allocated to Support Department 2?
b. How much of Support Department 1’s costs will be allocated to Production Department 1?
c. How much of Support Department 1’s costs will be allocated to Production Department 2?
d. How much of Support Department 2’s costs will be allocated to Production Department 1?
e. How much of Support Department 2’s costs will be allocated to Production Department 2?
39
Check Up Corner Sequential Method of Support Department

a. Support Department 2 uses 4% of Support Department 1’s machine hours,

1, 000
= 4%
1, 000 + 10, 000 + 14, 000
o Costs are allocated from Support Department 1 to Support Department 2 by multiplying

the $500,000 Support Department 1 costs by Support Department 2’s proportional
usage of Support Department 1’s machine hours. Thus, allocated costs are $500,000 ×
4% = $20,000.
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b. Production Department 1 uses 40% of Support Department 1’s machine hours,

10, 000
= 40%
1, 000 + 10, 000 + 14, 000

proportional usage of Support Department 1’s machine hours. Thus, allocated costs are
$500,000 × 40% = $200,000.
41

c. Production Department 2 uses 56% of Support Department 1’s machine hours,

14, 000
= 56%
1, 000 + 10, 000 + 14, 000

proportional usage of Support Department 1’s machine hours. Thus, allocated costs are
$500,000 × 56% = $280,000.
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d. Production Department 1 uses 20% of Support Department 2’s driver (square

feet), computed as follows:
1, 000
= 20%
1, 000 + 4, 000
o Costs to be allocated from Support Department 2 equal $270,000, determined by
adding the costs originally distributed to Support Department 2 ($250,000) to the costs
allocated to Support Department 2 from Support Department 1 ($20,000) in part a.
proportional usage of Support Department 2’s driver (square feet). Thus, allocated costs
are $270,000 × 20% = $54,000.
43

e. Production Department 2 uses 80% of Support Department 2’s driver (square

feet), computed as follows:
4, 000
= 80%
1, 000 + 4, 000
proportional usage of Support Department 2’s driver (square feet). Thus, allocated costs
are $270,000 × 80% = $216,000.
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The Reciprocal Services Method

(slide 1 of 10)
45

(slide 2 of 10)
• Steps 1 to 3 of the reciprocal method are the same

as for the direct and sequential methods.
Specifics Janitorial Cafeteria Cutting Assembly

Square feet 50 5,000 1,000 4,000
Number of
10 3 30 10
employees
Department cost $310,000 $169,000 $1,504,000 $680,000
• Support departments never allocate their own costs

to themselves.
o The two cells shaded in the table are not needed.
▪ These drivers represent services the support departments
used within their departments.
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(slide 3 of 10)
• In Step 4, the proportional usage of each support

department’s cost driver by the other departments to
which its costs are to be allocated is determined.
• The proportional usages of Janitorial services are
the same as those indicated with the sequential
method.
Janitorial Department Usage Cafeteria Department Usage
Square Usage Number of Usage
Department Department
Feet Percent employees Percent
Cafeteria 5,000 50% Janitorial 10 20%
Cutting 1,000 10 Cutting 30 60
Assembly 4,000 40 Assembly 10 20
Totals 10,000 100% Totals 50 100%
47

(slide 4 of 10)
• In Step 5, support department costs are allocated

simultaneously among the departments.
o This is done by using multiple algebraic equations with
variables for unknown quantities.
o To illustrate, costs are allocated from Janitorial to
Cafeteria, Cutting, and Assembly by multiplying the total
Janitorial costs by the proportional usage of the other
departments.
o The total Janitorial costs, however, include an unknown
amount for costs related to its employees’ use of the
cafeteria.
▪ Thus, the total of the Janitorial costs is expressed by the
unknown, J.
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(slide 5 of 10)
• Costs are allocated from Cafeteria to Janitorial,

Cutting, and Assembly by multiplying the total
Cafeteria costs by the proportional usage of the
other departments.
o But again, the total Cafeteria costs will include an
unknown amount for costs related to the Cafeteria
Department’s use of the Janitorial Department’s
services.
o Thus, the total of the Cafeteria costs is expressed by
the unknown, C.
49

(slide 6 of 10)
• The total costs of the Janitorial Department will

include 20% of the Cafeteria Department’s
costs, which is the percent usage of the cafeteria
by the Janitorial Department.
J = $310,000 + (0.20  C)
• The total costs of the Cafeteria Department will
include 50% of the Janitorial Department’s costs,
which is the percent usage of Janitorial services
by the Cafeteria Department.
C = $169,000 + (0.50  J)
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(slide 7 of 10)
• The preceding yields two equations with two

unknowns, as follows:
Equation 1: J = $310,000 + (0.20  C)

Equation 2: C = $169,000 + (0.50  J)
• Equation 2 can be rewritten in terms of J.

C = $169,000 + (0.50  J)
C – $169,000 = 0.50  J
C – $169, 000
= J
0.50
51

(slide 8 of 10)
• J in Equation 1 can then be replaced, resulting

in the following equation:
C – $169,000
Equation 3: = $310,000 + (0.20  C)
0.50
• Solving Equation 3 for C yields the following:
C – $169,000
= $310,000 + (0.20  C)
0.50
C – $169,000 = (0.50  $310,000) + (0.50  0.20  C)
C = $169,000 + (0.50  $310,000) + (0.50  0.20  C)
C = $169,000 + $155,000 + (0.10  C)
C – (0.10  C) = $169,000 + $155,000
0.90  C = $324,000
$324,000
C=
0.90
C = $360,000
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(slide 9 of 10)
• Adding the value of C to Equation 1 results in

the following:
J = $310,000 + (0.20  C)
= $310,000 + (0.20  $360,000)
= $310,000 + $72,000
= $382,000
• The total Janitorial Department cost and the total
Cafeteria Department cost can now be allocated
to the other departments based on the
percentage usages, as shown in the next slide.
53

(slide 10 of 10)
Janitorial Usage
Allocated
Departments Department × Percent =
Cost($)
Costs ($) (%)
Cafeteria Department 382,000 × 50 = 191,000
Cutting Department 382,000 × 10 = 38,000
Assembly Department 382,000 × 40 = 152,000
Totals 100 382,000
Cafeteria Usage
Allocated
Departments Department × Percent =
Cost($)
Costs ($) (%)
Janitorial Department 360,000 × 20 = 72,000
Cutting Department 360,000 × 60 = 216,000
Assembly Department 360,000 × 20 = 72,000
Totals 100 360,000
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Summary of Support Department Cost Allocations

Using the Reciprocal Services Method
55
Check Up Corner Reciprocal Services Method

of Support Department Cost Allocation
• Maeser Productions, a film production company, allocates support activity costs to

production activities using the reciprocal services method. Specifically, the costs
from two support activities, security and meals, are allocated to the production
activities of filming and makeup. Costs distributed to each department are
provided in the following table, as are driver levels for each of the two support
activities. Note that the security costs will be allocated based on asset value, and
meal costs will be allocated based on headcount.
Specifics Security Meals Filming Makeup

Asset value $8,000 $100,000 $850,000 $10,000
Headcount 10 5 25 15
Department cost $250,000 $465,000 $750,000 $67,000
a. What is the total cost to be allocated from Meals to the other three departments after
all support department cost allocations are made?
b. What is the total cost to be allocated from Security to the other three departments
after all support department cost allocations are made?
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Check Up Corner Reciprocal Services Method of Support

Department Cost Allocation Solution (slide 1 of 3)
a. Let X = the total cost to be allocated from Security, and let Y = the total cost to
be allocated from Meals.
o The total costs of the Security Department will include 10 ÷ (10 + 25 + 15) = 20% of the
meals costs.
o The total costs of the Meals Department will include $100,000 ÷ ($100,000 + $850,000 +
$50,000) = 10% of the security costs.
o Thus,
▪ Equation 1: X = $250,000 + (0.20 × Y)
▪ Equation 2: Y = $465,000 + (0.10 × X)
o Equation 2 can be rewritten in terms of X, as follows:
57

o Next, replace the X in Equation 1 with since this value equals X.

o The resulting equation is:
o Solving this equation for Y yields the following:
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o Now that Y is known, it can be plugged into Equation 1 to find X, as follows:
59
Comparison of Support Department Cost

Allocation Methods
• The total costs allocated to the Cutting and
Assembly departments are different depending on
which of the three support department allocation
methods is used, as shown in the next slide.
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Comparison of Direct, Sequential, and

Reciprocal Services Methods
61
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9/21/2021

Support Department Cost

• Obj. 1: Describe support departments and support

Support Departments (slide 1 of 3)

• A support department provides a necessary

Support Departments (slide 2 of 3)

• Because support department costs are only

Support Departments (slide 3 of 3)

o This approach ignores the fact that support

Allocation of Overhead Costs

Single Plantwide Rate (slide 1 of 2)

• When a single plantwide overhead rate is used to

Single Plantwide Rate (slide 2 of 2)

o This method ignores the fact that the processes used

Allocating Overhead Costs Using a Single

Multiple Production Department Rates

• When multiple production department rates are

Allocating Overhead Costs Using Multiple

Activity-Based Costing (slide 1 of 2)

• When activity-based costing (ABC) is used to apply

Allocating Overhead Costs Using Activity-

Activity-Based Costing (slide 2 of 2)

• The terms assign, distribute, apply, and allocate are

Allocating Support Department Costs

Steps of Support Department Cost Allocation

The Direct Method

Using the Direct Method – Decker Tables

• Step 1 - The costs for each department are determined

Using the Direct Method – Decker Tables

• Step 2 - An appropriate cost driver is determined for

• Step 3 - The usage of the support department cost

Using the Direct Method – Decker Tables

• Step 4 - The percentage usage of support

Using the Direct Method – Decker Tables

o Determining the percentage based on the number of

• Step 5 - Support department costs are allocated

Using the Direct Method – Decker Tables

Department Janitorial Department Costs

• The Cafeteria costs of $126,750 are allocated

Using the Direct Method – Decker Tables

• The support department costs are added to any

Summary of Support Department Cost

Check Up Corner Direct Method of Support

Check Up Corner Direct Method of Support Department

Check Up Corner Direct Method of Support Department

The Sequential Method or Step-Down Method

The Sequential Method (slide 1 of 7)

• Under the sequential method, support department

The Sequential Method – Allocation of Costs

The Sequential Method (slide 2 of 7)

• There may be a conflict in the preceding factors.

The Sequential Method (slide 3 of 7)

• In Step 4, the proportional usage of each

Janitorial Department Usage

The Sequential Method (slide 4 of 7)

• The proportional usage of Cafeteria services by the

The Sequential Method (slide 5 of 7)

• In Step 5, each support department’s costs are

The Sequential Method (slide 6 of 7)

• To illustrate, the Janitorial Department’s costs of

Janitorial Department Usage Allocated

The Sequential Method (slide 7 of 7)

• The total Cafeteria Department costs of $324,000