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Support Support Department Department
Cost Cost AllocationAllocation
CHAPTERCHAPTER
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1. Describe the difference between support departments and producing departments.
2. Calculate single and multiple changing rates for a support department.
3. Allocate support-department costs to producing departments using the direct, sequential, and reciprocal methods.
4. Calculate departmental overhead rates.
ObjectivesObjectivesObjectivesObjectives
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
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Types of DepartmentsTypes of Departments
Producing departments are
directly responsible for creating the products or
services sold to customers.
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Types of DepartmentsTypes of Departments
Supporting departments provide
essential support services for producing
departments.
Maintenance, grounds, engineering, personnel, storage
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1. Departmentalize the firm.
2. Classify each department as a support department or a producing department.
3. Trace all overhead costs in the firm to a support department or producing department.
4. Allocate supports department costs to the producing departments.
Steps in Allocating Support Department Steps in Allocating Support Department Costs to Producing DepartmentsCosts to Producing Departments
Steps in Allocating Support Department Steps in Allocating Support Department Costs to Producing DepartmentsCosts to Producing Departments
ContinuedContinuedContinuedContinued
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5. Calculate predetermined overhead rates for the producing departments.
6. Allocate overhead costs to the units of individual products through the predetermined overhead rates.
Steps in Allocating Support Department Steps in Allocating Support Department Costs to Producing DepartmentsCosts to Producing Departments
Steps in Allocating Support Department Steps in Allocating Support Department Costs to Producing DepartmentsCosts to Producing Departments
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Examples of Cost Drivers forExamples of Cost Drivers forSupport DepartmentsSupport Departments
Accounting Number of transactions
Cafeteria Number of employees
Engineering Number of change orders
Maintenance Machine hours; maintenance hours
Payroll Number of employees
Personnel Number of employees, firings, layoffs, new hires
Support Department Possible DriverSupport Department Possible Driver
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1. To obtain a mutually agreeable price.
2. To compute product-line profitability.
3. To predict the economic effects of planning and control.
4. To value inventory.
5. To motivate managers.
Objectives of AllocationObjectives of AllocationObjectives of AllocationObjectives of Allocation
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Note Objective 5: Allocations can Note Objective 5: Allocations can be used to motivate managers.be used to motivate managers.
Note Objective 5: Allocations can Note Objective 5: Allocations can be used to motivate managers.be used to motivate managers.
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AND
Fixed costs………………$26,190Variable costs….. $0.023 per page
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Estimated usage (in pages) by the three producing departments is as follows:
Audit Department 94,500
Tax Department 67,500
MAS Department 108,000
Total 270,000
Variable cost: 270,000 x $0.023 $ 6,210
Fixed cost 26,190
Total cost for 270,000 pages $32,400
Average cost ($32,400 ÷ 270,000) $0.12 per page
A Single Charge Rate
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A Single Charge RateTotal Photocopying Department Charge
Number of Pages
Charge per Page
Total Charges
x =
Audit Department 92,000 $0.12 $11,040
Tax Department 65,000 0.12 7,800
MAS Department 115,000 0.12 13,800
Total 272,000 $32,640
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Multiple Charging Rates
Peak Number of Pages
Proportion of Peak Usage
Total Fixed Costs
Amount Allocated to
Each Department
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
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Multiple Charging Rates
Number of Pages x $0.023
Fixed Cost Allocation
Total Charges
Audit department $2,116 $ 5,238 $ 7,354
Tax department 1,495 14,928 16,423
MAS department 2,645 6,024 8,669
Total $6,256 $26,190 $32,446
+ =
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Budgeted Versus Actual Usage
When we allocate support-department costs to the producing departments, should we allocate
actual or budgeted costs?
When we allocate support-department costs to the producing departments, should we allocate
actual or budgeted costs?
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Budgeted Versus Actual Usage
Budgeted costs.Budgeted costs.
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Budgeted Versus Actual Usage
A general principle of performance evaluation is that managers should not be held responsible for
costs or activities over which they have no control.
A general principle of performance evaluation is that managers should not be held responsible for
costs or activities over which they have no control.
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Use of Budgeted Data for Product Costing
Number of Copies
Total Rate
Allocated Charges
Audit Department 94,500 $0.12 $11,340
Tax Department 67,500 0.12 8,100
MAS Department 108,000 0.12 12,960
Total 270,000 $32,400
x =
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Use of Actual Data for Performance Evaluation Purposes
Number of Copies
Total Rate
Allocated Charges
Audit department 92,000 $0.12 $11,040
Tax department 65,000 0.12 7,800
MAS department 115,000 0.12 13,800
Total 272,000 $32,640
x =
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Choosing A Service Department Choosing A Service Department Cost Allocation MethodCost Allocation Method
Choosing A Service Department Choosing A Service Department Cost Allocation MethodCost Allocation Method
The three methods for allocating service department costs to producing departments are:
The Direct Method
The Sequential Method
The Reciprocal Method
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Support Departments Producing Departments
Direct costs* $250,000 $160,000 $100,000 $ 60,000
Normal activity:
Kilowatt-hours ----- 200,000 600,000 200,000
Maintenance hours 1,000 ----- 4,500 4,500
*For a producing department, direct costs refer only to overhead costs that are directly traceable to the department.
Data for Illustrating Allocation MethodsData for Illustrating Allocation MethodsData for Illustrating Allocation MethodsData for Illustrating Allocation Methods
Power Maintenance Grinding Assembly
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Direct Method of AllocationDirect Method of Allocation
Power Maintenance
Grinding Assembly
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Direct Method of AllocationDirect Method of Allocation
Power Maintenance
Grinding Assembly
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STEP 1—CALCULATE ALLOCATION RATIOSSTEP 1—CALCULATE ALLOCATION RATIOS Grinding AssemblyGrinding Assembly
Power =600,000
(600,000 + 200,000)0.75
200,000
(600,000 + 200,000)0.25
Maintenance =4,500
(4,500 + 4,500)0.50
4,500
(4,500 + 4,500)0.50
Direct MethodDirect MethodDirect MethodDirect Method
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STEP 2—ALLOCATE SUPPORTS DEPARTMENT STEP 2—ALLOCATE SUPPORTS DEPARTMENT COSTS USING THE ALLOCATION RATIOSCOSTS USING THE ALLOCATION RATIOS
Power Maintenance Grading AssemblyPower Maintenance Grading Assembly
Support Departments Producing DepartmentsSupport Departments Producing Departments
Direct costs $250,000 $160,000 $100,000 $ 60,000
Power -250,000 --- 187,500 62,500
Maintenance --- -160,000 80,000 80,000
$ 0 $ 0 $367,500 $202,500
a
b
a 0.75 x $250,000 = $187,500; 0.25 x $250,000 = $62,500
0.50 x $160,000 = $80,000 b
Direct MethodDirect MethodDirect MethodDirect Method
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Sequential Method of AllocationSequential Method of Allocation
STEP 1: Rank service departments
Power
11
Maintenance
22
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Sequential Method of AllocationSequential Method of Allocation
Power
Maintenance AssemblyGrinding
STEP 2
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Sequential Method of AllocationSequential Method of Allocation
Maintenance
AssemblyGrinding
STEP 2
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STEP 1—CALCULATE ALLOCATION RATIOSSTEP 1—CALCULATE ALLOCATION RATIOS Maint. Grinding AssemblyMaint. Grinding Assembly
Power =200,000
(200,000 + 600,000 + 200,000)
0.20
600,000
(200,000 + 600,000 + 200,000)
0.60
Sequential MethodSequential MethodSequential MethodSequential Method
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STEP 1—CALCULATE ALLOCATION RATIOSSTEP 1—CALCULATE ALLOCATION RATIOS Maint. Grinding AssemblyMaint. Grinding Assembly
4,500
(4,500 + 4,500)0.50
Mainte- nance
4,500
(4,500 + 4,500)0.50=
Sequential MethodSequential MethodSequential MethodSequential Method
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STEP 2—ALLOCATE SUPPORT DEPARTMENT STEP 2—ALLOCATE SUPPORT DEPARTMENT COSTS USING THE ALLOCATION RATIOSCOSTS USING THE ALLOCATION RATIOS
Power Maintenance Grading AssemblyPower Maintenance Grading Assembly
Support Departments Producing DepartmentsSupport Departments Producing Departments
Direct costs $250,000 $160,000 $100,000 $ 60,000
Power -250,000 50,000 150,000 50,000
Maintenance --- -210,000 105,000 105,000
$ 0 $ 0 $355,000 $215,000
a
b
a 0.20 x $250,000 = $50,000; 0.60 x $250,000 = $150,000;0.20 x $250,000 = $50,000
0.50 x $210,000 = $105,000 b
Sequential MethodSequential MethodSequential MethodSequential Method
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The reciprocal method of allocation recognizes all interactions among support departments.
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Power Maintenance Grading AssemblyPower Maintenance Grading Assembly
Support Departments Producing DepartmentsSupport Departments Producing Departments
Normal activity:Kilowatt-hours --- 200,000 600,000 200,000Maintenance
hours 1,000 --- 4,500 4,500
Reciprocal Method
Power Maintenance Grading AssemblyPower Maintenance Grading Assembly
Proportion of Output Used by DepartmentsProportion of Output Used by Departments
Allocated ratios:
Power --- 0.20 0.60 0.20
Maintenance 0.10 --- 0.45 0.45
Direct costs:
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M = Direct costs + Share of Power’s costs
M = $160,000 + $50,000 + 0.02M
0.98M = $210,000
M = $214,286
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P = Direct cost + Share of Maintenance’s cost
= $250,000 + 0.1($214,286) P
= $250,000 + $21,429P
= $271,429P
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ALLOCATE SUPPORT DEPARTMENT COSTS ALLOCATE SUPPORT DEPARTMENT COSTS USING THE ALLOCATION RATIOS AND THE USING THE ALLOCATION RATIOS AND THE
SUPPORT-DEPARTMENT COSTS FROM SUPPORT-DEPARTMENT COSTS FROM RECIPROCAL METHODS EQUATIONSRECIPROCAL METHODS EQUATIONS
Power Maintenance Grading AssemblyPower Maintenance Grading Assembly
Support Departments Producing DepartmentsSupport Departments Producing Departments
Direct costs $250,000 $160,000 $100,000 $ 60,000
Power -271,429 54,286 162,857 54,286
Maintenance 271,429 -214,286 96,429 96,429
Total $ 0 $ 0 $359,286 $210,715
from Slide 7-34
from Slide 7-35
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Direct MethodDirect Method
Grinding AssemblyGrinding Assembly
Comparison of Support Department Cost Allocations Using the Direct, Sequential, and
Reciprocal Methods
Comparison of Support Department Cost Allocations Using the Direct, Sequential, and
Reciprocal Methods
Direct costs $100,000 $ 60,000
Allocated from power 187,500 62,500
Allocated from maintenance 80,000 80,000
Total cost $367,500 $202,500
Click on button to compare with sequential method
Click on button to compare with reciprocal method Return Return to showto show
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Sequential MethodSequential Method
Grinding AssemblyGrinding Assembly
Comparison of Support Department Cost Allocations Using the Direct, Sequential, and
Reciprocal Methods
Comparison of Support Department Cost Allocations Using the Direct, Sequential, and
Reciprocal Methods
Direct costs $100,000 $ 60,000
Allocated from power 150,000 50,000
Allocated from maintenance 105,000 105,000
Total cost $355,000 $215,000
Click on button to compare with direct method
Click on button to compare with reciprocal method Return Return to showto show
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Reciprocal MethodReciprocal Method
Grinding AssemblyGrinding Assembly
Comparison of Support Department Cost Allocations Using the Direct, Sequential, and
Reciprocal Methods
Comparison of Support Department Cost Allocations Using the Direct, Sequential, and
Reciprocal Methods
Direct costs $100,000 $ 60,000
Allocated from power 162,857 54,286
Allocated from maintenance 96,429 96,429
Total cost $359,286 $210,715
Click on button to compare with direct method
Click on button to compare with sequential method
Return Return to to
showshow
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Departmental Overhead Rates
The overhead rate for the grinding department is computed as follows (assuming the normal level of activity is 71,000 MH):
OH rate = $355,000 71,000 = $5 per MH
The overhead rate for the assembly department is computed as follows (assuming the normal level of activity is 107,500 DLH):
OH rate = $215,000 107,500 = $2 per DLH
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Product Unit CostProduct Unit Cost
A product requires two machine hours of grinding per unit and one hour of assembly.
Overhead cost assigned:
2 x $5 $10
1 x $2 2
Total assigned $12
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The EndThe EndThe EndThe End
Chapter SevenChapter Seven
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