Allocation of Support Activity Costs and Joint Costs Chapter 17 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
Jan 18, 2016
Allocation of Support Activity Costs and
Joint Costs
Allocation of Support Activity Costs and
Joint Costs
Chapter 17
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Learning Objective
1
Learning Objective
1
17-2
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
17-3
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
17-4
Well, we measure theconsumption of the
allocation base in theproduction departments.
Service Department Cost Service Department Cost AllocationAllocation
How are servicedepartment costs
charged to productiondepartments?
17-5
Third, we allocate the servicedepartment cost based on the relative amount of the
allocation base consumed ineach production department.
Service Department Cost Service Department Cost AllocationAllocation
How are servicedepartment costs
charged to productiondepartments?
17-6
Allocated service departmentcosts become a part of themanufacturing overhead in
each production department.
Service Department Cost Service Department Cost AllocationAllocation
What happens toservice departmentcosts after they are
allocated to production
departments?
17-7
Allocated service departmentcosts become a part of themanufacturing overhead in
each production department.
I get it. They becomea part of the overhead
that is applied toproducts with apredeterminedoverhead rate.
Service Department Cost Service Department Cost AllocationAllocation
17-8
So, the costs become a part of the finished
product via the application of the pre-
determined factoryoverhead rate.
Exactly. Take a look atthis flow chart.
I think it will summarizeour discussion of theallocation process.
Service Department Cost Service Department Cost AllocationAllocation
17-9
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 AllocationService Department Cost AllocationFirst Stage Allocations
Service department costs are allocated to production departments.
17-10
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
17-11
Selecting Allocation BasesSelecting Allocation Bases
Criteria forselection
Personnel:Number ofemployees
Receiving:Units
handled
Security:Squarefootage
Power:Kilowatt
hours
Cafeteria:Number ofemployees
Custodial:Squarefootage
Accounting:
Staffhours
Simplicity
Availabilityof space orequipment
Benefits receivedby the production
department
17-12
Interdepartmental ServicesInterdepartmental ServicesService
Department(Cafeteria)
Service Department(Custodial)
ProductionDepartment(Machining)
ProductionDepartment(Assembly)
POWER DEPARTMENT
17-13
Interdepartmental ServicesInterdepartmental Services
Problem
Allocating costs when service departmentsprovide services to each other
Solutions
Direct Method
Step Method
17-14
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.
For an example please see the textbook.17-15
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.
17-16
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.
17-17
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.
For an example please see the textbook.17-18
Learning Objective
2
Learning Objective
2
17-19
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
17-20
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.
17-21
Charge toproduction
departments at abudgeted rate times
actual short-run usage of the allocation base.
Allocatebudgeted amounts
to operating departmentsin proportion to the
long-run averageusage of the
allocation base.
VariableCosts
FixedCosts
Budgeted costs should be allocated to avoid passing on inefficienciesfrom the service departments.
Dual Cost AllocationDual Cost Allocation
17-22
SimCo has a maintenance department and two productiondepartments: cutting and assembly. Variable maintenance
costs are budgeted at $0.60 per machine hour. Fixedmaintenance costs are budgeted at $200,000 per year.
Data relating to the current year are:
Allocate maintenance costs to the two operating departments.
Long-runMaintenance Actual
Production Usage as a HoursDepartments % of Total UsedCutting 60% 80,000 Assembly 40% 40,000 Total 100% 120,000
Dual Cost AllocationDual Cost AllocationExampleExample
17-23
Cutting AssemblyDepartment Department
Variable cost allocation: $0.60 × 80,000 hours used 48,000$ $0.60 × 40,000 hours used 24,000$ Fixed cost allocation 60% of $200,000 120,000 40% of $200,000 80,000 Total allocated cost 168,000$ 104,000$
Variable costs are allocated based on hours used.Fixed costs are allocated based long-run average usage.
Dual Cost AllocationDual Cost AllocationExampleExample
17-24
A Behavioral ProblemA Behavioral Problem
Problem
Department managers may underestimate
long-run average usage to reduce fixed cost
allocations.
Solution
Reward managers formaking accurate estimates
of long-run averageservice department needs.
17-25
Learning Objective
3
Learning Objective
3
17-26
The New Manufacturing The New Manufacturing EnvironmentEnvironment
More accurate cost tracing systemsreduce the need for allocation
of indirect costs.
More accurate cost tracing systemsreduce the need for allocation
of indirect costs.
17-27
The Rise of Activity-Based The Rise of Activity-Based CostingCosting
Service Department(Cafeteria)
Service Department(Accounting)
Service Department(Personnel)
The Product
First stage allocations are toactivities, not departments.
ActivityOne
ActivityTwo
17-28
Learning Objective
4
Learning Objective
4
17-29
Joint Product Costs
Product
Product
Product
Joint Product Cost AllocationJoint Product Cost Allocation
17-30
• 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.
Joint Product Cost AllocationJoint Product Cost Allocation
17-31
Consider the following example of an oil
refinery.We will assume only
two products,gasoline and oil.
Joint Product Cost AllocationJoint Product Cost Allocation
17-32
SeparateProcessing Costs
FinalSale
SeparateProcessing
FinalSale
SeparateProcessing
SeparateProcessing Costs
JointInput
JointProduction
Process
Split-OffPoint
JointProductCosts Oil
Gasoline
Joint Product Cost AllocationJoint Product Cost Allocation
17-33
Learning Objective
5
Learning Objective
5
17-34
Allocating Joint CostsAllocating Joint Costs
Joint Product Costs
Physical-UnitsMethod
Relative-Sales-Value
Method
Net-Realizable-Value Method
17-35
Allocating Joint CostsAllocating Joint Costs
Allocation based onthe relative valuesof the products at
the split-off point.
Allocation based on a physical measure of the
joint products at the split-off point.
Allocation based onfinal sales values lessseparable processing
costs.
Relative-Sales-Value Method
Physical-UnitsMethod
Net-Realizable-Value Method
17-36
Let’s look at anexample illustrating
the joint costallocation methods.
Allocating Joint CostsAllocating Joint Costs
17-37
240,000 gallons
360,000 gallons
JointProduction
Process
Split-OffPoint
Oil
Gasoline
Joint material
cost = $275,000
Joint conversioncost = $225,000
Physical-Units MethodPhysical-Units Method
17-38
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: $500,000 × 40% 200,000$ $500,000 × 60% 300,000$
Physical-Units MethodPhysical-Units Method
$225,000 joint conversion cost plus$275,000 joint material cost
17-39
$200,000sales value atsplit-off point
$600,000sales value atsplit-off point
JointProduction
Process
Split-OffPoint
Oil
Gasoline
Joint material
cost = $275,000
Joint conversioncost = $225,000
Relative-Sales-Value MethodRelative-Sales-Value Method
17-40
Product
Oil Gasoline Total
Sales value at split-off point 200,000$ 600,000$ 800,000$Proportionate share: $200,000 ÷ $800,000 25% $600,000 ÷ $800,000 75%
Allocated joint costs: $500,000 × 25% 125,000$ $500,000 × 75% 375,000$
$225,000 joint conversion cost plus$275,000 joint material cost
Relative-Sales-Value MethodRelative-Sales-Value Method
17-41
Net-Realizable-Value MethodNet-Realizable-Value Method
If products require further processing beyond the split-off point before they are
marketable, it may be necessary to estimate the net realizable value (NRV) at the split-off
point.
EstimatedNRV
FinalSalesValue
AddedProcessing
Costs–=
17-42
Net-Realizable-Value MethodNet-Realizable-Value Method
JointProduction
Process
Oil
Gasoline SeparateProcessing
SeparateProcessing
Joint material
cost = $275,000
Joint conversioncost = $225,000 Sales
Value$500,000
SalesValue
$1,200,000Split-OffPoint, Sales
Value Unknown SeparateProcessing Costs
$500,000
SeparateProcessing Costs
$200,000
17-43
Product
Oil Gasoline Total
Sales value 500,000$ 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: $500,000 × 30% 150,000$ $500,000 × 70% 350,000$
Net-Realizable-Value MethodNet-Realizable-Value Method
17-44
By-ProductsBy-Products
JointInput
JointProduction
Process
Split-OffPoint
JointCosts
By-products
MajorProduct
Relatively lowvalue or quantity
when compared tomajor products
MajorProduct
17-45
Two commonly used methods of accounting for by-products are . . .
1. By-product NRV is deducted from cost of joint process before allocation.
2. By-product NRV isdeducted from cost of main product.
1 2
By-ProductsBy-Products
17-46
Learning Objective
6
Learning Objective
6
17-47
Reciprocal Services MethodReciprocal Services Method
•Fully accounts for reciprocal services•More accurate•Can be combined with dual allocation
17-48
End of Chapter 17End of Chapter 17
17
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17-49