chap006.ppt

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© 2012 McGraw-Hill Education (Asia)

Cost Allocation

Chapter 6

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McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 2

Cost Allocation and Charges for ServicesRendered

Intracompany – inside the sa e entit!"his chapter will cover reasons for esta#lish ent of an internal service

charging s!ste or to have an cost allocation s!stetechni$ues and principles of allocation to #e used

allocation of service depart ent costs to operatingdepart ents using the direct and step%down ethods

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Cost Allocation and Charges for ServicesRendered

Intercompany – different entities within the sa egroup

"ransfer pricing

a! help group s ta' planninga! #e onitored and scrutini(ed #! ta' authoritiesand other interested regulating #odies)agents*needs to #e seen as an +ar s length transaction

-ill #e covered in Chapter ./ Appendi' A

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0earning 1#2ective .

3'plain the a2or reasons for3'plain the a2or reasons forthe need for allocatingthe need for allocating

non anufacturing costs*non anufacturing costs*

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Service 4epart ent Charges

1perating4epart ents

Carr! out centralpurposes of

organi(ation*

Service4epart ents

4o not directl!

engage inoperatingactivities*

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Reasons for Charging Service 4epart entCosts

"o encourage

operating depart entsto wisel! use servicedepart ent resources*

"o encourage

operating depart entsto wisel! use servicedepart ent resources*

"o provide operatingdepart ents withore co plete costdata for a5ing

decisions*

"o provide operatingdepart ents withore co plete costdata for a5ing

decisions*

"o help easure theprofita#ilit! of

operatingdepart ents*

"o help easure theprofita#ilit! of

operatingdepart ents*

"o create an incentivefor service

depart ents tooperate efficientl!*

"o create an incentivefor service

depart ents tooperate efficientl!*

Service department costs are charged to operatingdepartments for a variety of reasons including:

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http://slidepdf.com/reader/full/chap006ppt-56d96e399460c 7/61McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 7

anage ent NeedsNeed to understand the full cost of ro!idin" a

roduct or ser!ice (includin" su ortin" costs) to#a$e %etter decision&

7 Ensurin" co# etiti!e costin" and ricin"

7 Assess#ent of ris$ and otential success ofthe roduct/ser!ice7 'inancial and o erational forecasts and

lannin"7 Moti!atin" erfor#ance e!aluation and

reward s ste#7 o##unicatin" to e# lo ees a%out the

i# ortance of reco!erin" all indirect costs7 Encoura"in" e*cient and e+ecti!e use of

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$

"ransfer 8rices

OperatingDepartments

ServiceDepartments

"he service depart ent chargesconsidered can #e viewed as a transfer

price that is charged for servicesprovided #! service depart ents tooperating depart ents)co panies

within the group*

"he service depart ent chargesconsidered can #e viewed as a transfer

price that is charged for servicesprovided #! service depart ents tooperating depart ents)co panies

within the group*

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9actors "o Be Considered 9or "he Cost AllocationApproach and :nterco pan!):nterdepart ental charges

ost-%ene,t E!aluation7 Includin" tan"i%le and intan"i%le costs and %ene,ts

ause and e+ect7 A%sor tion of cost %ased on who causes it

ene,t .ecei!ed7 A%sor tion of cost %ased on the ulti#ate %enefactor

A%ilit to ear7 A%sor tion of cost %ased on who/which roduct has

the a%ilit and ro,t #ar"in to %ear the cost'airness or E uit

7 Ensurin" fair "a#e and decent ro,t to #oti!eser!ice ro!ider for e a# le use of a cost- lus

erfor#ance %ased award fee a roach to ensureualit deli!er of ser!ice/ roduct

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Service 4epart ent Charges

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http://slidepdf.com/reader/full/chap006ppt-56d96e399460c 11/61McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 1 1

0earning 1#2ective ;

Allocate costs of service Allocate costs of servicedepart ents to other operatingdepart ents to other operating

depart ents)units using the costdepart ents)units using the cost#ehavior concept*#ehavior concept*

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Charging Costs #! Behavior

-henever possi#le,varia#le and fi'ed

service depart ent costsshould #e charged

separatel!*

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Variable servicedepartment costs should be

charged to consuming departmentsaccording to whatever activitycauses the incurrence

of the cost.


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Charge fi'ed service depart ent costs toconsu ing depart ents in predeter inedlu p%su a ounts that are #ased on theconsu ing depart ent s pea5%period or

long%run average servicing needs*

Charge fi'ed service depart ent costs toconsu ing depart ents in predeter inedlu p%su a ounts that are #ased on theconsu ing depart ent s pea5%period or

long%run average servicing needs*

Are #ased on a ounts of capacit! each consu ing

depart ent re$uires*

Should not var! froperiod to period*


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Should Actual or Budgeted Costs BeCharged<

Budgeted variable

and fi ed service departmentcosts should be charged to

operating departments.

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Sipco has a aintenance depart ent and two operatingdepart ents= Cutting and Asse #l!* >aria#le aintenancecosts are #udgeted at ?@*6@ per achine hour* 9i'edaintenance costs are #udgeted at ?;@@,@@@ per !ear*

4ata relating to the current !ear are=

!llocate maintenance costs to the two operating departments.

"ercent of "ea#$"eriod

Operating %apacity &ours &oursDepartments 'e(uired "lanned )sed

%utting *+, -./+++ 0+/+++ !ssembly 1+, .+/+++ 1+/+++ 2otal hours 3++, 34./+++ 34+/+++

Sipco= An 3'a ple

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Actual hours

Sipco= 3nd of the Year

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8ercent of pea5%period capacit!*

Sipco= 3nd of the Year

Actual hours

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uic5 Chec55oster %ity has an ambulance service that is used

by the two public hospitals in the city. Variableambulance costs are budgeted at $1.4+ per mile.5i ed ambulance costs are budgeted at $34+/+++

per year. Data relating to the current year are:

"ercent of "ea# "eriod %apacity 6iles 6iles

&ospitals 'e(uired "lanned )sed6ercy 1., 3./+++ 3*/+++ 7orthside .., 3-/+++ 3-/.++ 2otal 3++, 84/+++ 88/.++

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uic5 Chec5

ow uch a #ulance service cost will #eallocated to erc! ospital at the end of the!ear<

a* ?.;.,;@@#* ?; D,D@@c* ?./E, @@d* ?..F,@@@


a* ?.;.,;@@#* ?; D,D@@c* ?./E, @@d* ?..F,@@@

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a* ?.;.,;@@#* ?; D,D@@c* ?./E, @@d* ?..F,@@@


a* ?.;.,;@@#* ?; D,D@@c* ?./E, @@d* ?..F,@@@

uic5 Chec5

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!llocating fi ed costs using a variable

allocation base.

8itfalls in Allocating 9i'ed Costs

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)sing salesdollars as an

allocation base.

8itfalls in Allocating 9i'ed Costs

'esultSales of one department

influence the servicedepartment costsallocated to other

departments.

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McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 2 4

Autos R s – An 3'a ple

Autos R s has one service depart ent and threesales depart ents, New Cars, sed Cars, and Car8arts* "he service depart ent costs total ?H@,@@@

for #oth !ears in the e'a ple*Contrar! to good practice, Autos R s allocates the

service depart ent costs #ased on sales*

Autos R s has one service depart ent and threesales depart ents, New Cars, sed Cars, and Car8arts* "he service depart ent costs total ?H@,@@@

for #oth !ears in the e'a ple*Contrar! to good practice, Autos R s allocates the

service depart ent costs #ased on sales*

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Autos R s – 9irst%!ear Allocation

?., @@,@@@ I ?/,@@@,@@@ @J of ?H@,@@@

:n the ne't !ear, the anager of the New Cars depart entincreases sales #! ? @@,@@@* Sales in the other depart ents

are unchanged* 0et s allocate the ?H@,@@@ service depart entcost for the second !ear given the sales increase*

:n the ne't !ear, the anager of the New Cars depart entincreases sales #! ? @@,@@@* Sales in the other depart ents

are unchanged* 0et s allocate the ?H@,@@@ service depart entcost for the second !ear given the sales increase*

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Autos R s – Second%!ear Allocation

?;,@@@,@@@ I ?/, @@,@@@ FJ of ?H@,@@@:f !ou were the anager of the New Cars depart ent, would

!ou #e happ! with the increased service depart entcosts allocated to !our depart ent<

:f !ou were the anager of the New Cars depart ent, would!ou #e happ! with the increased service depart ent

costs allocated to !our depart ent<

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© 2012 McGraw-Hill Education (Asia)

Service 4epart ent Allocations

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1perating 4epart ents

An operating depart ent carries outthe central purpose of the organi(ation

2he SurgeryDepartment

at 6ount

Sinai&ospital.

2he SurgeryDepartment

at 6ount

Sinai&ospital.

!"roductionDepartment

at6itsubishi.

!"roductionDepartment

at6itsubishi.

2he9eographyDepartment

at the

)niversity ofashington.

2he9eographyDepartment

at the

)niversity ofashington.

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Service 4epart ents

Service depart ents do not directl!engage in operating activities*

2he!ccountingDepartment

at 6acy;s.

2he &uman'esourcesDepartment

at algreens.

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:nterdepart ental Services

Service4epart ent

1perating4epart ent

%osts of the servicedepartment becomeoverhead costs to

the operatingdepartment

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Allocation Approaches

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Reciprocal Services

Service4epart ent .

Service4epart ent ;

hen servicedepartments provide

services to eachother we call them

reciprocal services.

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0earning 1#2ective /

Allocate service Allocate servicedepart ent costs todepart ent costs to

operating depart entsoperating depart entsusing the direct ethod*using the direct ethod*

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4irect ethod

Service4epart entKCafeteriaL

Service

4epart entKCustodialL

1perating4epart entK achiningL

1perating

4epart entKAsse #l!L

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4irect ethod – An 3'a ple

Service Departments Operating Departments

%afeteria %ustodial 6achining !ssemblyDepartmental costs

before allocation 8*+/+++$ <+/+++$ 1++/+++$ -++/+++$7umber of employees 3. 3+ 4+ 8+ S(uare feet occupied ./+++ 4/+++ 4./+++ .+/+++

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%afeteria %ustodial 6achining !ssemblyDepartmental costs before allocation 8*+/+++$ <+/+++$ 1++/+++$ -++/+++$

%afeteria allocation = = =

%ustodial allocation = = =

2otal after allocation = = = =

&ow much of the %afeteria and %ustodial costsshould be allocated to each operating department

using the direct method of cost allocation=

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%afeteria allocation >8*+/+++? 311/+++ =


2otal after allocation $ + = = =


!llocation base: 7umber of employees

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%afeteria allocation >8*+/+++? 311/+++ 43*/+++





$8*+/+++ @ 8+4+ A 8+

$43*/+++

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%ustodial allocation ><+/+++? 8+/+++ =

2otal after allocation $ + $ + .-1/+++$ =


!llocation base: S(uare feet occupied

$<+/+++ @ 4 /+++4 /+++ A +/+++

$8+/+++

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%ustodial allocation ><+/+++? 8+/+++ *+/+++

2otal after allocation $ + $ + .-1/+++$ <-*/+++$



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0earning 1#2ective D

"o allocate service"o allocate servicedepart ent costs todepart ent costs to

operating depart entsoperating depart entsusing the step%downusing the step%down

ethod*ethod*

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1perating

4epart entKAsse #l!L

Step%4own ethod

1nce a servicedepart ent s costs

are allocated,other service

depart ent costsare not allocated

#ac5 to it*


Service

4epart entKCustodialL

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2here are three #ey points to understand regardingthe step down method: :n #oth the direct and step%down ethods, an!

a ount of the allocation #ase attri#uta#le to the

service depart ent whose cost is #eing allocated isalwa!s ignored*

An! a ount of the allocation #ase that is attri#uta#le to a service depart ent whose cost has alread! #een allocated is ignored*

3ach service depart ent assigns its own costs to operating depart ents plus the costs that have #een allocated to it fro other service depart ents *

Step%4own ethod

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%afeteria %ustodial 6achining !ssemblyDepartmental costs before allocation 8*+/+++$ <+/+++$ 1++/+++$ -++/+++$7umber of employees 3. 3+ 4+ 8+ S(uare feet occupied ./+++ 4/+++ 4./+++ .+/+++

e will use the same data used in the direct method e ample.

Step%4own ethod – An 3'a ple

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%afeteria allocation = = = =


2otal after allocation = = = =

Allocate Cafeteria costs first sinceit provides ore service than Custodial*

Allocate Cafeteria costs first sinceit provides ore service than Custodial*


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%afeteria allocation >8*+/+++? *+/+++ = =



$8*+/+++ @ 3+3+ A 4+ A 8+

$*+/+++



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%afeteria allocation >8*+/+++? *+/+++ 34+/+++ =



$8*+/+++ @ 4+3+ A 4+ A 8+

$34+/+++



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%afeteria allocation >8*+/+++? *+/+++ 34+/+++ 30+/+++



$8*+/+++ @ 8+3+ A 4+ A 8+

$30+/+++



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%afeteria allocation >8*+/+++? *+/+++ 34+/+++ 30+/+++

%ustodial allocation >3.+/+++? = =

2otal after allocation $ + $ + = =

7ew total $<+/+++ original %ustodial cost plus $*+/+++ allocated from the %afeteria.


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%afeteria allocation >8*+/+++? *+/+++ 34+/+++ 30+/+++ %ustodial allocation >3.+/+++? .+/+++ =

2otal after allocation $ + $ + .-+/+++$ =

$3 +/+++ @ 4 /+++4 /+++ A +/+++

$ +/+++



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%afeteria allocation >8*+/+++? *+/+++ 34+/+++ 30+/+++ %ustodial allocation >3.+/+++? .+/+++ 3++/+++

2otal after allocation $ + $ + .-+/+++$ <0+/+++$

$3 +/+++ @ +/+++4 /+++ A +/+++

$3++/+++



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Reciprocal ethod

:nterdepart entalservices are given

full recognition

rather than partialrecognition as withthe step ethod*


Service4epart ent

KCustodialL


1perating4epart ent

KAsse #l!LBecause of its mathematical comple ity/

the reciprocal method is rarely used.Because of its mathematical comple ity/

the reciprocal method is rarely used.

i 5 Ch 5 4

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uic5 Chec5 4atafor 4irect and Step%4own ethods


!D6I7 B!%S !ccounting OthersDepartmental costs before allocation 30+/+++$ <+/+++$ 3<+/+++$ <++/+++$7umber of employees 3. . 4+ 0+ 7umber of "%s 34 4+ 30 3+4

Allocation #ases=

Business school ad inistration costs KA4 :NL= Nu #er of e plo!ees

Business Ad inistration co puter services KBACSL= Nu #er of personal co puters

"he direct ethod of allocation is used*

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uic5 Chec5

ow uch cost will #e allocated fro Ad inistration to Accounting<a* ? /6,@@@

#* ?.DD,@@@c* ?.H@,@@@d* ? ;F,@@@

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ow uch cost will #e allocated fro Ad inistration to Accounting<

a* ? /6,@@@

#* ?.DD,@@@c* ?.H@,@@@d* ? ;F,@@@

uic5 Chec5


!D6I7 B!%S !ccounting OthersDepartmental costs before allocation 30+/+++$ <+/+++$ 3<+/+++$ <++/+++$!D6I7 allocation >30+/+++? 8*/+++ 311/+++

$30+/+++ @4+

4+ A 0+ $8*/+++

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uic5 Chec5

ow uch total cost will #e allocated fro A4 :N and BACS co #ined to the Accounting 4epart ent<

a* ? ;, @@#* ?./ ,@@@c* ?;F@,@@@d* ? DE, @@


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a* ? ;, @@#* ?./ ,@@@c* ?;F@,@@@d* ? DE, @@

uic5 Chec5 !D6I7 B!%S !ccounting OthersDepartmental costs before allocation 30+/+++$ <+/+++$ 3<+/+++$ <++/+++$!D6I7 allocation >30+/+++? 8*/+++ 311/+++ B!%S allocation ><+/+++? 38/.++ -*/.++

2otal after allocation $ $ 48</.++$ 3/34+/.++$

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uic5 Chec5 4ata


!D6I7 B!%S !ccounting OthersDepartmental costs before allocation 30+/+++$ <+/+++$ 3<+/+++$ <++/+++$7umber of employees 3. . 4+ 0+ 7umber of "%s 34 4+ 30 3+4

Allocation #ases=

Business school ad inistration costs KA4 :NL= Nu #er of e plo!ees

Business ad inistration co puter services KBACSL= Nu #er of personal co puters

"he step ethod of allocation is used*

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uic5 Chec5


a* ?/ ,; @#* ?DE,@F;c* ?.H,@@@d* ?;6,///

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How #uch total cost will %e allocatedfro# A MIN and A 3 co#%ined to theAccountin" e art#ent4

a& 567 270%& 589 0:2c& 51; 000d& 52< 666

uic5 Chec5

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3nd of Chapter 6

chap006.ppt

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