managerial accounting chapter 17, 8th edition hilton

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

McGraw-Hill/Irwin

Allocation of Support Activity Costs and

Joint Costs

Allocation of Support Activity Costs and

Joint Costs

Chapter 17

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

McGraw-Hill/Irwin

Learning Objective

1

Learning Objective

1

17-3

First, we identify the factor that drives costs in the

service department.

This cost driver is called the allocation base.

How are servicedepartment costs

charged to productiondepartments?

Service Department Cost Service Department Cost AllocationAllocation

17-4

ProductionDepartments

ServiceDepartments

Carry out the central purposes

of an organization.

Provide supportthat facilitates the

activities of production departments.

Service Department Cost Service Department Cost AllocationAllocation

support

17-5

Service Department(Cafeteria)

Service Department(Accounting)

Service Department(Personnel)

ProductionDepartment(Machining)

ProductionDepartment(Assembly)

The Product

Service Department Cost Service Department Cost AllocationAllocation

First Stage AllocationsService department costs are allocated

to production departments.

17-6

Service Department(Cafeteria)

Service Department(Accounting)

Service Department(Personnel)

ProductionDepartment(Machining)

ProductionDepartment(Assembly)

The Product

Second Stage Allocations

Production department overhead costs, plus allocated service department costs, are applied to products using

departmental predetermined overhead rates.

Service Department Cost Service Department Cost AllocationAllocation

17-7

Selecting Allocation BasesSelecting Allocation Bases

Personnel:Number ofemployees

Receiving:Units

handled

Security:Squarefootage

Power:Kilowatt

hours

Cafeteria:Number ofemployees

Custodial:Squarefootage

Accounting:Staffhours

TypicalAllocation

Bases

17-8

Interdepartmental ServicesInterdepartmental ServicesService

Department(Cafeteria)

Service Department(Custodial)

ProductionDepartment(Machining)

ProductionDepartment(Assembly)

POWER DEPARTMENT

17-9

Interdepartmental ServicesInterdepartmental Services

Problem

Allocating costs when service departmentsprovide services to each other

Solutions

Direct Method

Step Method

17-10

Direct MethodDirect Method

Service Department(Cafeteria)

Service Department(Custodial)

ProductionDepartment(Machining)

ProductionDepartment(Assembly)

Cost of servicesbetween servicedepartments areignored and all

costs areallocated directly

to productiondepartments.

17-11

Step MethodStep Method

Service Department(Cafeteria)

Service Department(Custodial)

ProductionDepartment(Machining)

ProductionDepartment(Assembly)

Service departmentcosts are allocated

to other servicedepartments and

to productiondepartments, usually

starting with theservice department

that serves thelargest number of

other service departments.

17-12

Step MethodStep Method

Service Department(Cafeteria)

Service Department(Custodial)

ProductionDepartment(Machining)

ProductionDepartment(Assembly)

Once a servicedepartment’s costs

are allocated, other service

departments’ costsare not allocated

back to it.

17-13

Step MethodStep Method

Service Department(Cafeteria)

Service Department(Custodial)

ProductionDepartment(Machining)

ProductionDepartment(Assembly)

Custodial willhave a new

total to allocateto production

departments: itsown costs plus

those costsallocated fromthe cafeteria.

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

McGraw-Hill/Irwin

Learning Objective

2 (continued in Textbook)

Learning Objective

2 (continued in Textbook)

17-15

Fixed Versus Variable CostsFixed Versus Variable Costs

Are fixedand variable

costs allocateddifferently?

17-16

Result

When one departmentdecreases activity to

reduce allocations, alldepartments are penalized

because the chargeper use increases.

Remember, total fixedcosts do not change as

activity changes.

Fixed Versus Variable CostsFixed Versus Variable Costs

Problem

Allocating commonfixed costs using a

variable activityallocation base

17-17

Fixed Versus Variable CostsFixed Versus Variable Costs

Problem

Allocating commonfixed costs using a

variable activityallocation base

Solution

Use dual allocation method, allocatingfixed and variablecosts separately.

17-18

Dual Cost AllocationDual Cost Allocation

VariableCosts

Charge toproduction

departments at abudgeted rate times

actual short-run usage of the allocation base.

FixedCosts

Allocatebudgeted amounts

to operating departmentsin proportion to the

long-run averageusage of the

allocation base.

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

McGraw-Hill/Irwin

Learning Objective

3 – 6 can be found in the

Textbook

Learning Objective

3 – 6 can be found in the

Textbook

17-20

End of Chapter 17End of Chapter 17

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