Centre:

Production Production Direct, Step down, Reciprocal

Selling Service
Admin
General
3 steps:
Allocation & Apportion 1
Reapportionment 2
Absorption 3
Overhead Analysis

POAR
Types
Applied

Reverse Note
entry for Unit Cost
over
absorbed
Cost of goods sold ---------------- DR 2 effects:
Manufacturing Overhead -- Cr Under absorbed
Mitigation
Work in process ---------------- DR Over absorbed
Finished goods ------------------ DR
Cost of goods sold -------------- DR
Manufacturing Overhead -- Cr
Learning
Objective 10
Allocate service
department costs to
operating departments
using the direct method.

McGraw- Slide 88
 Direct
Method
Service Operating
Interactions Department Department
between service (Cafeteria)
departments are (Machining)
ignored and all
costs are
allocated directly
to operating Service Operating
departments. Department Department
(Custodial)
(Assembly)

McGraw- Slide 89
Direct Method – An
Example

Service Department Allocation Base

Cafeteria Number of employees
Square feet
Custodia occupied
l
McGraw- Slide 90
Direct Method – An
Example

How much of the Cafeteria and Custodial costs

should be allocated to each operating
department using the direct method of cost
allocation?
McGraw- Slide 91
Direct Method – An
Example

20
$360,000 × = $144,000
20 + 30

Allocation base: Number of employees

McGraw- Slide 92
Direct Method – An
Example

30
$360,000 × = $216,000
20 + 30

Allocation base: Number of employees

McGraw- Slide 93
Direct Method – An
Example

25,000
$90,000 × = $30,000
25,000 + 50,000

Allocation base: Square feet occupied

McGraw- Slide 94
Direct Method – An
Example

50,000
$90,000 × = $60,000
25,000 + 50,000

Allocation base: Square feet occupied

McGraw- Slide 95
Learning
Objective 11
To allocate service
department costs to
operating departments
using the step-down
method.

McGraw-
 Step-Down
Method
Service Operating
Department Department
Once a service (Cafeteria)
department’s costs (Machining)
are allocated,
other service
department costs
are not allocated
back to it.
Service Operating
Department Department
(Custodial)
(Assembly)

McGraw-
 Step-Down Method
There are three key points to understand regarding
the step-down method:
 In both the direct and step-down methods, any
amount of the allocation base attributable to the
service department whose cost is being allocated
is always ignored.
 Any amount of the allocation base that is
attributable to a service department whose cost
has already been allocated is ignored.
 Each service department assigns its own costs to
operating departments plus the costs that have
been allocated to it from other service
departments.
McGraw-
Step-Down Method – An
Example
We will use the same data used
in the direct method example.

Service Department Allocation Base

Cafeteria Number of employees
Square feet
Custodia occupied
McGraw-
Step-Down Method – An
Example

Allocate Cafeteria costs first since

it provides more service than Custodial.

McGraw-
Step-Down Method – An
Example

10
$360,000 × = $60,000
10 + 20 + 30

Allocation base: Number of employees

McGraw-
Step-Down Method – An
Example

20
$360,000 × = $120,000
10 + 20 + 30

Allocation base: Number of employees

McGraw-
Step-Down Method – An
Example

30
$360,000 × = $180,000
10 + 20 + 30

Allocation base: Number of employees

McGraw-
Step-Down Method – An
Example

New total = $90,000 original Custodial cost

plus $60,000 allocated from the Cafeteria.

McGraw-
Step-Down Method – An
Example

25,000 = $50,000
$150,000 × 25,000 + 50,000

Allocation base: Square feet occupied

McGraw-
Step-Down Method – An
Example

50,000
$150,000 × = $100,000
25,000 + 50,000

Allocation base: Square feet occupied

McGraw-
Reciprocal
Method Service Operating
Department Department
Interdepartmental (Cafeteria)
services are given (Machining)
full recognition
rather than partial
recognition as with
the step method. Service Operating
Department Department
(Custodial)
(Assembly)
Because of its mathematical complexity,
the reciprocal method is rarely used.

McGraw-
 Quick Check Data
for Direct and Step-Down
Methods

The direct method of allocation is used.

Allocation bases:
 Business school administration costs
(ADMIN): Number of employees
 Business Administration computer services (BACS):
Number of personal computers
McGraw-
Quick
Check 
How much cost will be allocated from
Administration to Accounting?
a. $ 36,000
b. $144,000
c. $180,000
d. $ 27,000

McGraw-
Quick
Check 
How much cost will be allocated from
Administration to Accounting?
a. $ 36,000
b. $144,000
c. $180,000
d. $ 27,000

20
$180,000 × = $36,000
20 + 80
McGraw-
Quick
Check 
How much total cost will be allocated from
ADMIN and BACS combined to the
Accounting Department?
a. $ 52,500
b. $135,000
c. $270,000
d. $ 49,500

McGraw-
Quick
Check 
How much total cost will be allocated from
ADMIN and BACS combined to the
Accounting Department?
a. $ 52,500
b. $135,000
c. $270,000
d. $ 49,500

18
$90,000 × $13,500
=
18 + 102
McGraw-
 Quick Check
Data

The step method of allocation is used.

Allocation bases:
 Business school administration costs
(ADMIN): Number of employees
 Business administration computer services (BACS):
Number of personal computers
McGraw-
Quick
Check 
How much total cost will be allocated from
ADMIN and BACS combined to the
Accounting Department?
a. $35,250
b. $49,072
c. $18,000
d. $26,333

McGraw-
Quick
Check 
How much total cost will be allocated from
ADMIN and BACS combined to the
Accounting Department?
a. $35,250
b. $49,072
c. $18,000
d. $26,333

McGraw-