Professional Documents
Culture Documents
Chapter 17 N
Chapter 17 N
Allocation of
Support Activity
Costs and Joint
Costs
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning
Objective
1
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Service Department Cost
Allocation
First, we identify the factor
How are service that drives costs in the
department costs service department.
charged to production This cost driver is called
departments? the allocation base.
1-3
Service Department Cost
Allocation
support
Service Production
Departments Departments
1-4
Service Department Cost
Allocation
1-5
Service Department Cost
Allocation
Third, we allocate the service
How are service department cost based on
department costs the relative amount of the
charged to production allocation base consumed in
departments? each production department.
1-6
Service Department Cost
Allocation
What happens to
service department
costs after they are Allocated service department
allocated to costs become a part of the
production manufacturing overhead in
departments? each production department.
1-7
Service Department Cost
Allocation
I get it. They become
a part of the overhead
that is applied to Allocated service department
products with a costs become a part of the
predetermined manufacturing overhead in
overhead rate. each production department.
1-8
Service Department Cost
Allocation
So, the costs become
a part of the finished Exactly. Take a look at
product via the this flow chart.
application of the pre-
determined factory I think it will summarize
overhead rate. our discussion of the
allocation process.
1-9
Service Department Cost Allocation
First Stage Allocations
Service department costs are allocated
Service to production departments.
Department
(Cafeteria) Production
Department
Service (Machining)
The
Department
Product
(Accounting) Production
Department
Service (Assembly)
Department
(Personnel)
Second Stage Allocations
Production department overhead costs, plus allocated service department costs,
are applied to products using departmental predetermined overhead rates. 1-10
Selecting Allocation Bases
1-11
Selecting Allocation Bases
Criteria for
Personnel:
selection Custodial:
Number of Square
employees Simplicity footage
Availability
Receiving: of space or Cafeteria:
equipment
Units Number of
handled Benefits received employees
by the production
department
Security: Power:
Accounting:
Square Kilowatt
footage Staff hours
hours
1-12
Interdepartmental Services
Service
Department Production
(Cafeteria) Department
(Machining)
POWER DEPARTMENT
Production
Service Department
Department (Assembly)
(Custodial)
1-13
Interdepartmental Services
Problem
Allocating costs when service departments
provide services to each other
Solutions
Direct Method
Step Method
1-14
Direct Method
Service Production
Cost of services Department Department
between service (Cafeteria) (Machining)
departments are
ignored and all
costs are
allocated directly
to production Service Production
departments. Department Department
(Custodial) (Assembly)
1-16
Step Method
Service Production
Department Department
Once a service
(Cafeteria) (Machining)
department’s costs
are allocated,
other service
departments’ costs
are not allocated
back to it. Service Production
Department Department
(Custodial) (Assembly)
1-17
Step Method
Service Production
Department Department
Custodial will (Cafeteria) (Machining)
have a new
total to allocate
to production
departments: its
own costs plus
those costs Service Production
allocated from Department Department
the cafeteria. (Custodial) (Assembly)
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Fixed Versus Variable Costs
Problem
Result
Allocating common
fixed costs using a When one department
variable activity decreases activity to
allocation base reduce allocations, all
departments are penalized
because the charge
per use increases.
Remember, total fixed
costs do not change as
activity changes.
1-20
Fixed Versus Variable Costs
Problem
Allocating common
fixed costs using a
variable activity
allocation base
Solution
Use dual allocation
method, allocating
fixed and variable
costs separately.
1-21
Dual Cost Allocation
Variable Fixed
Costs Costs
Allocate
Charge to budgeted amounts
production to operating departments
departments at a in proportion to the
budgeted rate times long-run average
actual short-run usage of usage of the
the allocation base. allocation base.
1-24
A Behavioral Problem
Problem Solution
Department managers Reward managers for
may underestimate making accurate estimates
long-run average usage of long-run average
to reduce fixed cost service department needs.
allocations.
1-25
Learning
Objective
3
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
The New Manufacturing
Environment
1-27
The Rise of Activity-Based
Costing
Service First stage allocations are to
Department activities, not departments.
(Cafeteria)
Activity
Service
One
The
Department
Product
(Accounting)
Activity
Two
Service
Department
(Personnel)
1-28
Learning
Objective
4
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Joint Product Cost Allocation
Product
Product
1-30
Joint Product Cost Allocation
• Concept:
– In some industries, 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 – costs of processing joint
products prior to the split-off point.
1-31
Joint Product Cost Allocation
1-32
Joint Product Cost Allocation
Joint
Product
Separate Final
Costs Oil
Processing Sale
Joint Separate
Joint
Production Processing Costs
Input
Process
Split-Off Separate
Point Processing Costs
1-33
Learning
Objective
5
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Allocating Joint Costs
Physical-Units
Method
Relative-
Joint Product Sales-Value
Costs Method
Net-Realizable-
Value Method
1-35
Allocating Joint Costs
Allocation based on a
Physical-Units physical measure of the
Method joint products at the
split-off point.
Allocation based on
Relative-Sales- the relative values
Value Method of the products at
the split-off point.
Allocation based on
Net-Realizable- final sales values less
Value Method separable processing
costs.
1-36
Allocating Joint Costs
Let’s look at an
example illustrating
the joint cost
allocation methods.
1-37
Physical-Units Method
Joint conversion
cost = $225,000 Oil 240,000 gallons
Joint
Joint material Production
cost = $275,000 Process
Split-Off
Point
1-38
Physical-Units Method
Product
Oil Gasoline Total
Output quantities in gallons 240,000 360,000 600,000
Proportionate share:
240,000 ÷ 600,000 40%
360,000 ÷ 600,000 60%
Allocated joint costs:
$500,000 × 40% $ 200,000
$500,000 × 60% $ 300,000
$600,000
Gasoline sales value at
split-off point
Split-Off
Point
1-40
Relative-Sales-Value Method
Product
Oil Gasoline Total
Sales value at split-off point $ 200,000 $ 600,000 $ 800,000
Proportionate share:
$200,000 ÷ $800,000 25%
$600,000 ÷ $800,000 75%
Allocated joint costs:
$500,000 × 25% $ 125,000
$500,000 × 75% $ 375,000
Final Added
Estimated
= Sales – Processing
NRV
Value Costs
1-42
Net-Realizable-Value Method
Joint conversion Sales
cost = $225,000 Separate
Oil Value
Processing
$500,000
Joint Separate
Joint material Production Processing Costs
cost = $275,000 Process $200,000
Separate Sales
Gasoline Value
Processing
Split-Off $1,200,000
Point, Sales
Value Unknown Separate
Processing Costs
$500,000
1-43
Net-Realizable-Value Method
Product
Oil Gasoline Total
Sales value $ 500,000 $ 1,200,000 $ 1,700,000
Less additional processing costs 200,000 500,000 700,000
Estimated NRV at split-off point $ 300,000 $ 700,000 $ 1,000,000
Proportionate share:
$300,000 ÷ $1,000,000 30%
$700,000 ÷ $1,000,000 70%
Allocated joint costs:
$500,000 × 30% $ 150,000
$500,000 × 70% $ 350,000
1-44
By-Products
Joint
Costs Major
Product
Joint
Joint Production Major
Input Product
Process
Relatively low
value or quantity
By-products
when compared to
major products
Split-Off
Point
1-45
By-Products
2
1
1. By-product NRV is
deducted from cost of joint
process before allocation.
2. By-product NRV is
deducted from cost of main
product.
1-46
Learning
Objective
6
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Reciprocal Services Method
1-48
End of Chapter 17
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1-49