Professional Documents
Culture Documents
ACCOUNTING
SUPPORT-DEPARTMENT COST
ALLOCATION
1
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
2
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
1. Describe the difference between support
departments and producing departments.
2. Calculate single & multiple charging
rates for a support department.
3. Allocate support-department costs to
producing departments using the direct,
sequential, & reciprocal methods.
Continued
3
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
4. Compute departmental overhead rates .
5. Describe the allocation of joint costs to
products. (Appendix).
4
QUESTIONS TO THINK ABOUT:
Hamilton & Barry, CPAs
5
QUESTIONS TO THINK ABOUT:
Hamilton & Barry, CPAs
1 between support
departments and producing
departments.
8
ALLOCATION:
ALLOCATION: Definition
Definition
9
COST ALLOCATION
While
While cost
cost allocation
allocation doesdoes not
not affect
affect
total
total product
product cost,
cost, itit will
will affect
affect
pricing
pricing && profitability
profitability of of individual
individual
products
products depending
depending on on method
method
used.
used.
10
COMMON
COMMON COSTS:
COSTS: Definition
Definition
12
How are overhead costs treated
for producing & support
departments?
13
Why can’t a support
department have an overhead
rate to assign to products?
14
CAUSAL
CAUSAL FACTORS:
FACTORS: Definition
Definition
15
TYPES OF DEPARTMENTS:
Examples
Manufacturing plant
Producing departments (Assembly & Finishing)
Support departments (Storeroom, Cafeteria,
Maintenance, General Factory)
Bank
Producing (Auto Loans, Commercial Lending,
Personal Banking
Support departments (Drive-Thru, Data
Processing, Bank Administration)
16
How are costs allocated from
departments to products?
17
OBJECTIVES OF
ALLOCATION
To obtain a mutually agreeable price
To compute product-line profitability
To predict the economic effects of planning &
control
To value inventory
To motivate managers
18
COMPETITIVE PRICING
Requires understanding costs
Overstating leads to loss of business
Understating produces losses
Leads to evaluating product or service mix
Dropping some services
Reallocating resources
Repricing
19
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
20
What kinds of charging rates
are used?
21
PHOTOCOPYING
PHOTOCOPYING DEPT.:
DEPT.:
Barry
Barry&&Hamilton
Hamilton
22
FORMULAS: Single Charging Rate
Charging rate =
Total estimated costs / Estimated usage
$ 32,400 / 270,000 = $0.12 per page
Allocating charges:
# Pages x Charging rate = Allocated charges
23
CHARGE
CHARGE ALLOCATION:
ALLOCATION: Single
Single
Charging
Charging Rate
Rate
Charge Total
Dept # Pages Rate Charges
Audit 92,000 $ 0.12 $ 11,040
Tax 65,000 0.12 7,800
MAS 115,000 0.12 13,800
Total 272,000 $ 32,640
24
What do you need to know to
use multiple charging rates?
25
PHOTOCOPYING DEPT: Causal
Factors
Causal
Causal factor
factor for
for size
size &
& costs
costs of
of
photocopying
photocopying is is monthly
monthly peak
peak
usage.
usage.
26
FORMULAS: Multiple Charging Rates
Peak usage =
Average usage Audit + MAS 16875
Peak usage, Tax 22,500
Peak usage 39,375
Allocating charges:
Fixed costs = Proportion Peak x Fixed Cost
Variable costs = Estimated Variable cost x
Actual page usage
27
FIXED
FIXED COST
COST ALLOCATION
ALLOCATION
Peak Proportion Total Fixed Total
Dept # Pages Peak Usage Cost Charges
Audit 7,875 0.20 $ 26,190 $ 5,238
Tax 22,500 0.57 26,190 14,928
MAS 9,000 0.23 26,190 6,024
Total 39,375 $ 26,190
28
COST ALLOCATION:: Multiple
COSTALLOCATION Multiple Charging
Charging Rates
Rates
29
What are the uses of budgeted
costs?
30
PERFORMANCE EVALUATION
General principle
Managers should not be held responsible for
cost or activities over which they have no
control
Corollary
Actual costs should not be allocated to producing
departments because they include either
efficiencies or inefficiencies of supporting
departments
31
When should actual &
budgeted costs be used?
32
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
Allocate support-
3
department costs to
producing departments
using the direct,
sequential, & reciprocal
methods.
33
MULTIPLE SUPPORT
DEPARTMENTS
When
When aa company
company has
has multiple
multiple
support
support departments
departments that
that interact,
interact,
managers
managers must
must choose
choose an
an
allocation
allocation method.
method.
34
ALLOCATION METHODS:
Multiple Service Departments
36
MULTIPLE SUPPORT
DEPARTMENTS: Data
37
ALLOCATION: Direct Method
38
ALLOCATION: Direct Method Step 1
Develop allocation
ratios for support
department costs.
39
ALLOCATION: Direct Method Step 2
Prorate support
department costs to
producing depts.
40
ALLOCATION: Sequential Method
41
ALLOCATION: Sequential Method
Step 1
Develop allocation
ratios for support
depts. costs according
to ranking.
42
ALLOCATION: Sequential Method
Step 2
Allocate support depts.
costs to other
departments in order of
rankings.
43
FORMULAS: Multiple Charging Rates
44
ALLOCATION: Reciprocal Method
Step 1
Develop allocation
ratios for support
departments costs.
45
ALLOCATION: Reciprocal Method
Step 2
Allocate support depts.
costs to producing
departments.
46
COMPARING ALLOCATION
METHODS
Accountants choose
between better allocation
& cost benefit of easier
method.
47
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
4 Compute departmental
overhead rates.
48
COSTING PROCESS
49
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
5
Describe the allocation
of joint costs to
products. (Appendix).
50
JOINT
JOINT PRODUCTS:
PRODUCTS: Definition
Definition
51
SPLIT-OFF
SPLIT-OFF POINT:
POINT: Definition
Definition
52
ACCOUNTING FOR JOINT PRODUCT COSTS
3 methods
Physical units: joint costs distributed on basis of
physical units
Sales-value-at-split-off: joint costs distributed on
basis of sales value at split-off
Net realizable value: joint costs distributed on
basis of hypothetical sales value
By-products: because insignificant sales value,
no joint cost allocation
53
THE
THE END
END
Have
Have aa good
good study
study
54