8/13/2019 CH15+Departmental+Costing+Oncourse 3
1/28
Cost Allocation:Service Department Costs
8/13/2019 CH15+Departmental+Costing+Oncourse 3
2/28
8/13/2019 CH15+Departmental+Costing+Oncourse 3
3/28
8/13/2019 CH15+Departmental+Costing+Oncourse 3
4/28
Bloomington Stone Company producing
Bybee Stone Company
Closer tohome.
Pentagon
Iowa State
Capital Building
8/13/2019 CH15+Departmental+Costing+Oncourse 3
5/28
Departmentalization Bybee Stone:
8/13/2019 CH15+Departmental+Costing+Oncourse 3
6/28
Bybee StoneAllocation Methods - Illustration
8/13/2019 CH15+Departmental+Costing+Oncourse 3
7/28
Direct method Costs are allocated only to producing departments
Step (Sequential) method
Costs allocations are performed in a step-down fashionto other support departments and producingdepartments using predetermined ranking procedures.
Reciprocal method
Recognizes interactions of support departments priorto allocation to producing departments
Support Dept. Cost Allocation Methods
8/13/2019 CH15+Departmental+Costing+Oncourse 3
8/28
Bybee Stone (Direct Method)Allocation Methods - Illustration
8/13/2019 CH15+Departmental+Costing+Oncourse 3
9/28
600,000
$250,000 = $187,500600,000 + 200,000
Direct allocation
200,000
$250,000 = $62,500600,000 + 200,000
4,500 $160,000 = $80,000
4,500 + 4,500
4,500
$160,000 = $80,0004,500 + 4,500
Allocate Power Dept costs based on kilowatt-hours:
Grinding
Assembly
Grinding
Assembly
Allocate Maintenance Dept costs based onmaintenance-hours:
8/13/2019 CH15+Departmental+Costing+Oncourse 3
10/28
Direct allocation
8/13/2019 CH15+Departmental+Costing+Oncourse 3
11/28
Rank support departments based on level of service toother service departments
Allocate First allocate support departments direct cost to all other
support departments and producing departments Next allocate support departments costs (direct +
previously allocated) to subsequent support and producing
Next allocate support departments costs (direct +previously allocated) to subsequent support andproducing.
Once a support departments costs are allocated itnever receives a subsequent allocation
Step (sequential) allocation
8/13/2019 CH15+Departmental+Costing+Oncourse 3
12/28
Allocation Methods (Step Method) -Illustration
Power department first because 20% of its costs are used by maintenance,
while only 10% of maintenance are used by power.
8/13/2019 CH15+Departmental+Costing+Oncourse 3
13/28
Step (Sequential) allocation
200,000 Maint kWh $250,000 = $50,000
200,000 600,000 200,000
+ +Maint kWh Grinding kWh Assembly kWh
Step 1: Allocate Power Dept costs based on kilowatt-hours (20% to Maint. Dept vs. 10% from Maint. to Power):
To Maintenance
600,000 Grinding kWh
$250,000 = $150,000200,000 600,000 200,000+ +
Maint kWh Grinding kWh Assembly kWh
200,000 Assembly kWh
$250,000 = $50,000200,000 600,000 200,000+ +
Maint kWh Grinding kWh Assembly kWh
To Grinding
To Assembly
8/13/2019 CH15+Departmental+Costing+Oncourse 3
14/28
Sequential allocation
Step 2: Allocate Maintenance Dept costs (direct+ allocated) based on maintenance-hours:
4,500 Grinding
$210,000 = $105,0004,500 4,500+
Grinding Assembly
To Grinding
Costs to allocate: $160,000 direct + $50,000 allocated = $210,000
To Assembly 4,500 Assembly
$210,000 = $105,0004,500 4,500+
Grinding Assembly
8/13/2019 CH15+Departmental+Costing+Oncourse 3
15/28
Sequential allocation
8/13/2019 CH15+Departmental+Costing+Oncourse 3
16/28
Considers all reciprocal flows simultaneously
Allocate
Develop equations for each service departmentrepresenting cost to be allocated plus cost allocatedfrom other service departments
Solve system of equations by substitution.
Most accurate of all methods
Reciprocal allocation
8/13/2019 CH15+Departmental+Costing+Oncourse 3
17/28
Reciprocal allocation
8/13/2019 CH15+Departmental+Costing+Oncourse 3
18/28
Reciprocal allocation
Utilize a series of simultaneous linear equations
M = $160,000 + .2PM = $160,000 + .2($250,000 + .1M)
M = $214,285.71
P = $250,000 + .1M
P = $250,000 + .1($214,285.71)P = $271,428.57
8/13/2019 CH15+Departmental+Costing+Oncourse 3
19/28
Reciprocal allocation
271,429 * .60 = 162,857 to grinding271,429 * .20 = 54,286 to assembly271,429 * .20 = 54,286 to maintenance
Power Department
214,286 * .45 = 96,429 to grinding214,286 * .45 = 96,429 to assembly214,286 * .10 = 21,429 to power
Maintenance Department
8/13/2019 CH15+Departmental+Costing+Oncourse 3
20/28
8/13/2019 CH15+Departmental+Costing+Oncourse 3
21/28
After we allocate costs to each department we can
still use ABC to allocate costs to specific products
Departmental Allocations and ABC
DepartmentalCost Methods
SupportDept.Costs
ProducingDept.Costs
ProducingDept.Costs
Products
Products
Products
Products
ABCCost Methods
8/13/2019 CH15+Departmental+Costing+Oncourse 3
22/28
8/13/2019 CH15+Departmental+Costing+Oncourse 3
23/28
Single and Dual Rates
Often firms have difficulty distinguishing fixed andvariable costs
Firms could use dual allocation, which separates
variable and fixed costs and traces the variablecosts directly to the departments that caused thecost
We will focus on single allocation in this class.
8/13/2019 CH15+Departmental+Costing+Oncourse 3
24/28
Williams Company produces two software products (NetA and NetB)in two separate departments (A and B). These products arehighly regarded network-maintenance programs. NetA is used for
small networks and NetB is used for large networks. Williams isknown for the quality of its products and its ability to meet datespromised for software upgrades. Department A produces NetAand Department B produces NetB. The production departmentsare supported by two support departments, systems design andprogramming services. The source and use of the supportdepartment time are summarized below:
From Design Programming Dept. A Dept. B
Design 0 4,000 3,000 9,000 16,000
Programming 600 0 600 800 2,000
Total Labor-
Hours
To
8/13/2019 CH15+Departmental+Costing+Oncourse 3
25/28
What are the costs allocated to the two production departments from the two
service departments using the direct method.
From Design Programming Dept. A Dept. B
Design 0 4,000 3,000 9,000 16,000
Programming 600 0 600 800 2,000
Total Labor-Hours
To
8/13/2019 CH15+Departmental+Costing+Oncourse 3
26/28
What are the costs allocated to the two production departments from the two
service departments using the step method.
From Design Programming Dept. A Dept. B
Design 0 4,000 3,000 9,000 16,000
Programming 600 0 600 800 2,000
Total Labor-Hours
To
Design Programming Dept. A Dept. B Total
The Step Method
First Step
Programming Service % 30.00% 30.00% 40.00%
Amount 21,000 (70,000)$ 21,000 28,000
Second StepDesign Service % 18.75% 56.25%
Allocation percent per direct method 25.00% 75.00%
Amount (95,000) 23,750 71,250
Totals for Production Departments 44,750 99,250 144,000
Support Departments Producing Departments
8/13/2019 CH15+Departmental+Costing+Oncourse 3
27/28
What are the costs allocated to the two production departments from the twoservice departments using the reciprocal method.
Design = $74,000 + (0.30 x Programming)Programming = $70,000 + (0.25 x Design)
Design = $102,702.70Programming = $ 95,675.68
(102,702.70) 25,675.68
28,702.70-0- -0-
8/13/2019 CH15+Departmental+Costing+Oncourse 3
28/28
Recommended Problems
15-19 & 15-20
(15-20 only Reciprocal Method)
Required Problems
15-21 & 15-22