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D.B. CMA Jon A. Rooney. CPA McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies.Service Department and Joint Cost Allocation Chapter 11 PowerPoint Authors: Susan Coomer Galbreath... Ph. Inc.A. Booker.. CPA Charles W.. D. Ph. Caldwell. CIA Cynthia J. All rights reserved. Ph. . CPA.D.D.

User departments could be other service departments or production or marketing departments that produce or market the organization’s products. 11-3 .LO 11-1 Service Department Cost Allocation LO LO 11-1 11-1 Explain Explain why why service service costs costs are are allocated. an information systems department is a service department that provides information systems support to other departments. For example. the production department uses the services provided by the information systems and human resources departments. allocated. Service departments provide services to other departments. departments. For example. and a human resources department provides hiring and training services to other User departments use the functions of service departments.

LO 11-1 Service Department Cost Allocation Service and User Departments – Carlyle Coal Company 11-4 .

LO 11-2 Cost Allocation: Direct Method LO LO 11-2 11-2 Allocate Allocate service service department department costs costs using using the the direct direct method. method. 11-5 . • Direct method: Charges costs of service departments to user departments without making allocations among service departments.

LO 11-3 Cost Allocation: Step Method LO 11-3 Allocate service department costs using the step method. • Once an allocation is made from a service department no further allocations are made back to that service department. • Generally. 11-6 . • The step method allocates some service department costs to other service departments. allocate in order of proportion of services provided to other service departments.

LO 11-3 Cost Allocation: Step Method Cost Flow Diagram: Step Method – Carlyle Coal Company 11-7 .

method. including services provided to other service departments. • It accounts for cost flows among service departments providing services to each other. • The reciprocal method recognizes all services provided by any service department. 11-8 . • It requires a simultaneous equation solution.LO 11-4 Cost Allocation: Reciprocal Method LO LO 11-4 11-4 Allocate Allocate service service department department costs costs using using the the reciprocal reciprocal method.

LO 11-4 Cost Allocation: Reciprocal Method Cost Flow Diagram: Reciprocal Method – Carlyle Coal Company 11-9 .

LO 11-5 The Reciprocal Method and Decision Making • The total variable cost of Information Services.000. 11-10 .000.000 variable costs plus any avoidable fixed costs.000. when you consider the use of Administration by Information Services is $1. • The total cost savings that would come from eliminating Information Services are the $1.

• Joint Products • Outputs from a common input and common production process • Split-Off point • Stage of processing that separates two or more products 11-11 .LO 11-6 Allocation of Joint Costs LO 11-6 Explain why joint costs are allocated. Joint cost is the cost of a manufacturing process with two or more outputs.

000 Lo-grade coal: 30.LO 11-6 Allocation of Joint Costs Split-off point Hi-grade coal: 15.000 Mining costs $270.000 11-12 .000 units Sales value: $300.000 units Sales value: $450.

LO 11-6 Allocation of Joint Costs • Evaluating executive performance • Determining the inventory value • Net realizable value method • Physical quantities method 11-13 .

• Net realizable value (NRV): Sales value of each product at the split-off point. • Estimated net realizable value: Sales price of a final product minus additional processing costs necessary to prepare a product for sale.LO 11-7 Joint Cost Allocation Methods LO 11-7 Allocate joint costs using the net realizable value method. • Net realizable value method: Joint cost allocation based on the proportional values of the products at the split-off point. 11-14 .

weight.LO 11-8 Physical Quantities Method LO 11-8 Allocate joint costs using the physical quantities method. 11-15 . Joint cost allocation is based on measurement of the volume. or other physical measure of the joint products at the split-off point.

• Product prices are not set by the market. • Significant processing occurs between the split-off point and the first point of marketability. 11-16 .LO 11-8 Physical Quantities Method • Output product prices are volatile.

11-17 . • Method 2: The proceeds from sale of the by-product are treated as other revenue.LO 11-10 Deciding What to Do with ByProducts LO 11-10 Account for by-products. • By-products are outputs of joint production processes that are relatively minor in quantity or value. • Method 1: The net realizable value from sale of the by-products is deducted from the joint costs before allocation to the main products.

LO 11-11 Calculation of the Reciprocal Method Using Spreadsheets LO 11-11 (Appendix) Use spreadsheets to solve reciprocal cost allocation problems. we can state the equation: Total costs = Direct costs + Allocated costs • Equations can be expressed in matrix form and solved using the matrix functions of a spreadsheet program such as Microsoft Excel®. 11-18 . • For any department.

End of Chapter 11 11-19 .