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MANAGERIAL ACCOUNTING

TOPIC:

Allocation of Support Activity
Costs And Joint Costs
PRESENTED TO:

MAM UMMARA SAHER
PRESENTED BY:

ASIM RAFIQUE
S/2014-1018
CLASS:

MBE3

OUTLINES


Allocate service department costs trough different
methods.
Dual approach to service department cost allocation.
Difference between two-stage cost allocation with
departmental overhead rates and ABC.
Allocate join costs among joint products using some
techniques.
Purposes for which joint cost allocation is useful
and for which it is not.

Learning
Objective
1

McGraw-Hill/Irwin

Copyright © 2009 by The McGraw-Hill Companies, Inc. All

Service Department Cost
Allocation
support

Service
Departments

Provide support
that facilitates the
activities of production
departments.

Production
Departments
Carry out the
central purposes
of an organization.

17-4

GOAL OF COST ALLOCATION  The goal of cost allocation is to ensure that all costs incurred by the organization ultimately are assigned to its products or services. In order to determine the cost of those goods or services. all service departments costs must be allocated to the production departments in which the goods or services are produced.   Service department cost allocation Joint product cost allocation SERVICE DEPARTMENT COST ALLOCATION  The cost of running a service department is part of the cost incurred by organization in producing goods or services. .

plus allocated service department costs.) predetermined overhead Assembly dept. Production department Overhead Application 3 overhead costs. costs are allocated to production dept. Manufacturing Machinery Repair Factory Custodial service dept.) 2 3 Stage(Allocation) nd Production Depts. (Service depts. Overhead distribution Dept.COST ALLOCATION PROCESS 1Service Depts. the .(All are costs accumulated in applied production to products departments using are departmental applied to products. Machining dept.

2. Service department cost allocation: costs are allocated to corresponding production departments according to usage.ALLOCATION PROCESS  1. . There are three types of allocation process: Cost distribution: Cost in various cost pools are distributed to all departments(service and production). Cost application: Costs are assigned to the goods or services produced. 3.

SELECTING ALLOCATION BASES Personnel: Number of employees Typical Allocation Bases Receiving: Units handled Security: Square footage Custodial: Square footage Cafeteria: Number of employees Accounting: Staf hours Power: Kilowatt hours .

..... Personnel ………..................................... Administrative and Accounting --- 5% --- ----- 5% Adm................. & A/c ………...... Allocation Bases Service Department 70% Allocation Base Patient Records .................................................... 50% 60% B.... Number of employees Administration and Accounting .............. Annual patient load Human Resources ........ Size of department (measured in square metres of space) ... Percentage of Service Output Consumed by Using Departments Provider of service ---------------------------------------------------------------------------------------- User of service Patient Personnel Records Patient records……........A..... Internal Medicines…...... --- 20% --- Direct-patient Orthopedics………… 30% 25% 35% Care depts... Service depts..........

.. 47. ........500 $ 76....000 $350.. 15.000 Administration and Accounting ...500 Total ....... to their production departments based on the percentage of use by each production dept.......................000 60...... $24...000 142........... Service Department Costs Service Departments Variable Cost Fixed Cost Total Cost to Be Allocated Patient Records ....000 Human Resources ......C....... $86........ Direct Method: In the direct method.......500 $100.................. NOTE: The proportion of each service department’s costs to be allocated to each direct-patient-care department is determined by the relative proportion of the service department’s output consumed by each direct-patient-care department................500 $263..000 METHODS 1.000 190......000 45........... we allocate the costs of each service dept....

190.............000 This method ignores the fact service departments provide other service departments..... .Direct-Patient-Care Departments Using Services Orthopaedics Internal Medicine Provider of Service Cost Proportion Patient Records ..$350. & Accounting .000 50/75 40..000 Amount Proportion Amount $ 30..000 Grand total $350.. $100.................000 25/75 Adm... 60..000 70..000 60/95 120....000 30/100 Human Resources .......000 70/100 $ 70..000 20......000 $230.000 $120.000 35/95 Total …...... that some services to .

............ Internal Medicine Administration & Accounting Orthopaedics Orthopaedics Notice that even though Administration and Accounting serves Human Resources.. . the managerial accountant first chooses a sequence in which to allocate the service departments costs (2) (3) (1) Patient Human Administratio from largest service provider to other Service and Records Resources n production depts............. there is no cost allocation in that direction after its costs have been allocated to its lower ranked counterparts..... STEP-DOWN/TRICKLE DOWN METHOD Under this method.......................... To These Departments Human Resources .......2..... Patient Records Orthopaedics Internal Medicine Administration and Accounting ................. Internal Medicine Patient Records ................ & Accounting Cost Allocated from This Service Dept.......................

000 (50/100) $15................................................000 - 3...000 & Accounting $190...............................000 30.......... $350.......421 127....... $60.... $60...000 Medicine $100...Service Department Department Human Administration Direct-Patient-Care Orthopaedics Patient Records Internal Resources Costs prior to allocation .............................900 72....000 .100 (30/100) (70/100) Total cost allocated to each department ........ $120. $103..........321 $229............. & Accounting Dept......................579 (35/95) (60/95) Allocation of Patient Records Department costs ...000 12.............679 Total cost allocated to direct-patient-care departments .000 Allocation of HR Department costs ..................000(20/100) (5/100) (25/100) Allocation of Adm.......$202.......................... costs ........000 $30........................000 74...

RECIPROCAL-SERVICES METHOD  The direct method and the step-down method both ignore the fact that the Administration and Accounting Department serves the Human Resources Department. Human Patient Administratio Records Resources n & Accounting . Neither of these methods allocates any of the costs incurred in Administration and (H) (R) (A) Accounting back to Human Resources.

and Accounting Dept.000+. A denotes the total cost of the Adm.000+.20H (3)  where R denotes the total cost of the Patient Records Dept.05A (2) A= 190. H denotes the total cost of the Human Resources Dept.  .STEP TO SPECIFY A SET OF EQUATIONS The first step in the technique is to specify a set of equations that express the relationships between the departments.05H (1) H= 60.000+. R= 100.

202 Then we substitute the value for H we just obtained into equation (3). and solving for H as follows:  H= 60000+.05H R=103.510 Their sums add up to more than $350.000 because of cross-allocations.20HA=204.040  Now we can solve for R by substituting the value for H into equation (1) as follows: R=100000+.Let’s begin by substituting the expression for A from equation (3) into equation (2).  .20H) H= 60000+9500+.01 99H=69500 H=70. and solve for A as follows: A=190 000+.05(190000+.

............982 Total cost allocate to direct-patient-care departments ....30) each department ..202) $ 35......018 $229.....510*(... (70.’s costs .......’ costs ........457 (................. $350.50) Allocation of Adm & Accounting Dept...424 (....101 (......000 Allocation of HR Dept.....35) 31............................$60..........202 (....000 3..000 14..................60) Allocation of Patient Records Dept.414 (..... –0– (0) 72.040) –0– (0) - $100...510) $ 17..........Service Department Direct-Patient-Care Department Human Administration Patient Records Orthopaedics Internal Resources & Accounting Traceable costs …………... $120.... 10..................000 .....040*(....................551*(.......................20) (204.05) –0– (0) (103........25) 71......................053 (.70) Total cost allocated to Medicine $190..05) 122.............’s costs ......

DIRECT METHOD Cost of services between service departments are ignored and all costs are allocated directly to production departments. Service Department Service Department Production Department Production Department .

Service Department Service Department Production Department Production Department .STEP METHOD Custodial will have a new total to allocate to production departments: its own costs plus those costs allocated from the cafeteria.

RECIPROCAL METHOD Service Department Service Department Production Department Production Department .

All .Learning Objective 2 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies. Inc.

DUAL ALLOCATION METHOD  Allocating fixed and variable costs separately. Variable Fixed Costs Charge to production departments at a budgeted rate times actual short-run usage of the allocation base. Costs Allocate budgeted amounts to operating departments in proportion to the long-run average usage of the allocation base. .

Data relating to the current year are: Production Departments Cutting Assembly Total Long-run Maintenance Usage as a % of Total 60% 40% 100% Actual Hours Used 80.DUAL COST ALLOCATION EXAMPLE SimCo has a maintenance department and two production departments: cutting and assembly. Variable maintenance costs are budgeted at $0.000 Allocate maintenance costs to the two operating departments.60 per machine hour. Fixed maintenance costs are budgeted at $200.000 120.000 per year.000 40. .

DUAL COST ALLOCATION EXAMPLE Cutting Department Variable cost allocation: $0.000 Total allocated cost $ Assembly Department 48. Fixed costs are allocated based long-run average usage.000 120.000 $ 24.000 Variable costs are allocated based on hours used.000 40% of $200.000 $ 168. .000 hours used Fixed cost allocation 60% of $200.000 $ 80.000 hours used $0.60 × 40.000 104.60 × 80.

Inc.Learning Objective 3 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies. All .

a number of products are produced from a single raw material input. Key terms:    Joint products – products resulting from a process with a common input. Split-off point – the stage of processing where joint products are separated. .JOINT PRODUCT COST ALLOCATION  Concept:   In some industries. Joint product cost – costs of processing joint products prior to the split-off point.

JOINT PRODUCT COST ALLOCATION Joint Product Costs Joint Input Oil Joint Production Process Final Sale Separate Processing Costs Gasoline Split-Off Point Separate Processing Separate Processing Separate Processing Costs Final Sale .

Inc. All .Learning Objective 4 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies.

METHODS OF J.A 1. 3. 2.C.Relative-SalesValue Method Allocation based on the relative values of the products at the split-off point.Net-RealizableValue Method Allocation based on final sales values less separable processing costs.Physical-Units Method Allocation based on a physical measure of the joint products at the split-off point. .P.

000 Oil 240.000 Joint material cost = $275.000 gallons Joint Production Process Split-Off Point .000 gallons Gasoline 360.PHYSICAL-UNITS METHOD Joint conversion cost = $225.

000 joint material cost Total 600.000 $ 300.000 .000 Gasoline 360.000 × 60% 240.000 ÷ 600.000 360.000 joint conversion cost plus $275.000 ÷ 600.000 Allocated joint costs: $500.000 × 40% $500.000 40% 60% $ 200.000 $225.PHYSICAL-UNITS METHOD Product Oil Output quantities in gallons Proportionate share: 240.

000 sales value at split-off point Joint Joint material Production cost = $275.000 sales value at split-off point Gasoline $600.000 Process Split-Off Point .RELATIVE-SALES-VALUE METHOD Joint conversion cost = $225.000 Oil $200.

000 × 25% $500.000 $ 800.000 ÷ $800.000 joint conversion cost plus $275.000 ÷ $800.000 $ 600.000 25% 75% $ 125.000 $600.RELATIVE-SALES-VALUE METHOD Product Oil Sales value at split-off point Proportionate share: $200.000 Allocated joint costs: $500.000 joint material cost .000 $ 375.000 $225.000 × 75% Gasoline Total $ 200.

it may be necessary to estimate the net realizable value (NRV) at the split-of point.NET-REALIZABLE-VALUE METHOD If products require further processing beyond the split-of point before they are marketable. Estimated NRV = Final Sales Value – Added Processing Costs .

NET-REALIZABLE-VALUE METHOD Joint conversion cost = $225.000 Oil Joint material cost = $275.200. Sales Value Unknown Sales Value $500.000 Separate Processing Separate Processing Sales Value $1.000 Separate Processing Costs $500.000 Gasoline Split-Off Point.000 Joint Production Process Separate Processing Costs $200.000 .

000.000 × 70% Gasoline Total $ 500.000 500.000.000 $ 350.000 ÷ $1.000 × 30% $500.000 700.NET-REALIZABLE-VALUE METHOD Product Oil Sales value Less additional processing costs Estimated NRV at split-off point Proportionate share: $300.700.000 30% 70% $ 150.000 ÷ $1.200.000.000 Allocated joint costs: $500.000 $ 1.000 .000 $ 700.000 $ 1.000 $ 1.000 $ 300.000 $700.000 200.

Learning Objective 5 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies. All . Inc.

C.A IS USEFULL & THOSE FOR WHICH IT IS NOT It is useful when finding costs for It is useful when finding costs for products products but but  Not for making financial decisions.   .  Not for making financial decisions.P.PURPOSE FOR WHICH J.

BY-PRODUCTS Joint Costs Joint Input Joint Production Process Major Product Major Product By-products Split-Off Point Relatively low value or quantity when compared to major products .

Then the by-product’s sales value is deducted from the production cost of the main products.  .  An alternative procedure is to inventory the byproduct at its sales value at split off.METHODS A common practice in accounting is to subtract a by-product’s net realizable value from the cost of the joint process. Then the remaining joint cost is allocated among the major joint products.

END OF CHAPTER 18 18 .

THANK YOU 42 .