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11
Service Department and Joint Cost Allocation
11-1.
Companies allocate costs to estimate or assess the costs of their activities (products,
processes, etc.). It is an estimate and subject to the problem that cost allocation
contains an arbitrary element. Not allocating costs, however, is also an estimate—an
estimate of zero. This may be appropriate for some decisions, but not for others.
Some of the disadvantages (costs) include:
(1) Additional bookkeeping;
(2) Additional management costs in selecting allocation methods and allocation
bases;
(3) Costs of making the wrong decision if the allocations provide misleading
information.
Some of the advantages (benefits) of cost allocation include:
(1) Instilling responsibility for all costs of the company in the division managers;
(2) Relating indirect costs to contracts, jobs and products;
(3) Constructing performance measures (“net profit”) for a division that may be more
meaningful to management than contribution margins.
11-2.
The essential difference is the allocation of costs among service departments. The
direct method makes no inter-service-department allocation, the step method makes a
partial inter-service-department allocation, while the reciprocal solution method fully
recognizes inter-service-department activities. All three methods allocate costs to the
production departments based on the production department’s relative use.
11-1
11-3.
Allocations usually begin from the service department that has provided the greatest
proportion of its services to other service departments, or that services the greatest
number of other service departments. This criterion is used to minimize the
unrecognized portion of reciprocal service department costs. (Recall that the amount of
service received by the first department to allocate in the step allocation sequence is
ignored.)
Another criterion employed is the amount of cost incurred by the service department.
As with other allocation problems, it is a combination of the diversity (the proportion of
resources used by other service departments) and the costs involved that are important
in making this choice.
11-4.
Joint cost allocations are usually made to assign a cost to a product after the split-off
point. This is usually done for external reporting, tax, or rate-making purposes or to
satisfy contract requirements. Because the joint costs are common to the outputs, it is
not possible to find a direct way of relating the costs. Rather, the costs are related to
economic benefits on the basis of some measure of relative outputs.
11-5.
Because net realizable values of the output provide a measure of the economic benefit
received from each output from the production process, this method is usually preferred
when it can be implemented. Further, the physical quantities may be difficult to
compare (e.g., weights versus volumes).
11-2
Chapter 11 - Service Department and Joint Cost Allocation
11-6.
It could be preferable to use a physical quantities measure if it reflects the economic
benefit ultimately obtainable from the production process, particularly if there is no
objective selling price for joint products. Some examples include public utility rate
setting, energy price regulation, new market setting, and new product price setting. In all
of these cases, it is not possible to use the relative sales value method. Of course, the
physical quantity measure used must make sense. Thus, ounces of lead should not be
added to ounces of silver for joint cost allocation purposes.
11-7.
For joint products, costs of the inputs up to the split-off point are allocated to each of
the products. Costs prior to split-off are not allocated to by-products in the same way as
to the main (joint) products. Either joint costs (costs incurred prior to split-off) equal to
the sales value of the by-product are allocated to the by-product, reducing the costs
allocated to the main products (Method 1 in the text) or no joint costs are allocated to
the by-product and it is credited with its sales value (Method 2).
11-8.
The joint costs of the product are irrelevant to this decision. Using the principle of
differential costs, the joint costs are not differential in this decision. They are sunk costs,
because they must be incurred under either decision.
11-3
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"You will naturally ask why I am telling these facts now. I have
two reasons. Fortune has deserted me at last. I had intended to
reveal Guy's parentage when he stood in the dock so deeply stained
with crime that part of the odium he incurred would necessarily fall
upon you. More recently I determined that I would refrain from
putting that coping stone on the edifice of my revenge. Not out of any
misplaced tenderness for you. Do not think that. My reason was a
purely selfish one. My adopted son had somehow endeared himself
to me. I foresaw in him an ornament to my own profession. I became
sentimental and so, foolish. I thought he should always remain my
son. I forgot that he had your blood in his veins and I let him fall
under your influence. I forgot too that a girl can shatter the most
complete philosophy with a glance of her eyes. The young fool has
fallen in love with Meriel Challys, and the consequence is that he has
got into his head a ridiculous idea that he must deliver himself up to
justice in order to make amends for his legitimate spoiling of the
Egyptians, Flurscheim and yourself. He is proposing to do so within
the next forty-eight hours, so you may have time to prevent his
voluntary martyrdom—a martyrdom he will certainly regret, judging
from my own experience. Do not think, however, that I am only
animated by Guy's interests. I am still keenly alive to my own safety.
I have had quite enough of prison life, and am well prepared with
means of escape, though I do not desire to end my existence just
yet. Of course, if you care to sacrifice your son in order that I shall
not escape, that is your affair. Guy knows nothing of his parentage,
though I have taken steps to inform him of it should you fail to do so.
I shall not leave him entirely in your hands."
Captain Marven laid the letter down, and, dropping his face in
his hands, he groaned aloud. His heart was sick with anguish. His
long lost son was returned to him, but in what guise? By training, by
profession, he was a thief. Guy Marven, his son, a thief! The horror
of it was almost too great to be borne! It was the bitterest blow of his
life, far more bitter even than the blow which had fallen when his
baby boy had been stolen from him. If Lynton Hora could have
watched the effect produced by his communication, even his thirst
for revenge would have been satisfied. But more bitter even than the
knowledge of what his son had become was the realisation of the
burden of duty which the revelation thrust upon him. As he realised
his duty in the matter, Captain Marven's face was grey with anguish.
He had found his son only to lose him again—to lose him amongst
the yellow-garbed denizens of the convict prison. More, it was he
who must, with his own hand, send him to that outer darkness. God
grant that his son would be a man! God grant it! That was Captain
Marven's earnest prayer.
Then his wife and Meriel? What if they were to learn of Guy's
relationship. Captain Marven could only dimly conceive the effect
upon them.
The servant came again to announce that the cab was awaiting
him. Marven rose, but it was as a man ten years older than the one
who had opened Hora's letter ten minutes before. His face was lined,
and his hand tremulous, but his lips were set firmly. He saw his duty
plainly before him. There was only one path he could tread, even
though every step on that path gave him a fresh pang. But he must
see Guy first, before he took that step.
He entered the cab and was driven to the Albany. He was more
master of himself by the time he arrived. He wondered what he
should do if Guy should be absent from home, for the time at his
command was short. Within an hour he was due at the Foreign
Office.
Guy opened the door, and started with amazement at sight of
his visitor's face.
"Captain Marven!" he exclaimed. Then a great fear took
possession of him. "Meriel?" he gasped.
Marven grasped the intention of the query.
"Meriel was all right when I left her this morning," he replied.
Guy's relief was obvious. "Are you ill? Is anything the matter?"
he asked, as he closed the door behind the Captain, and followed
him into his sitting-room.
Marven was at a loss for words. Hora's letter was in his hand.
He held it out to Guy, and said huskily, "Read this."
"But——" interrupted Guy.
"No, read this," repeated Marven.
Guy took the letter. He recognised the handwriting, and he
wondered. His wonder gave place to amazement as he read.
Amazement was succeeded by horror, and, when he had finished
reading, the paper dropped from his hands, and he turned his face
away from the man who had brought it, in a vain endeavour to
conceal his emotion. He was hardly aware that a hand was laid on
his arm, until a voice, tremulous with emotion, said, "Guy, my son."
He disdained concealment then. He wheeled round and
clutched blindly at the two hands outstretched to meet his own.
"Father, forgive! forgive!" he muttered brokenly.
CHAPTER XXVII
DUTY CALLS
"Vivien,"
"The Guarded Flame," etc.
"A Confession,"
"The Widow," etc.