Today’s quote. Any idiot can face a crisis: It is this day-to-day living that wears you out. --Anton Chekhov. Allocation of: Support Department Costs, Common Costs, and Revenues. Chapter 15. Overview. Allocation of support department costs Example of 3 ways Allocation of Common Costs
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An operating department (a production
department in manufacturing companies)
adds value to a product or service.
A support department (service department)
provides the services that assist other operating
and support departments in the organization.
The single-rate cost allocation method
pools together all costs in a cost pool.
The dual-rate cost allocation method
classifies costs in each cost pool into
two cost pools: a variable-cost cost
pool and a fixed-cost cost pool.
Budgeted rates let the user department know in
advance the cost rates they will be charged.
During the budget period, the supplier department,
not the user departments, bears the risk of any
unfavorable cost variances.
Organizations commit to infrastructure costs on
the basis of a long-run planning horizon.
The use of budgeted usage to allocate these fixed
costs is consistent with the long-run horizon.
Typically, you use actual usage to allocate variable costs.
Allocates support department costs to operating
Step-down (sequential allocation) method:
Allocates support department costs to other support
departments and to operating departments.
Reciprocal allocation method:
Allocates costs by services provided among all
John Deere Tractors, Inc. has two
support departments and two operating departments.
Budgeted Capacity .
To be supplied by:MaintenanceLegalImplementsEngines
Maintenance 10% 40% 50%
Legal 5% 60% 35%
Actual Usage .
Maintenance 10% 30% 60%
Legal 10% 70% 20%
Actual costs were:
Maintenance $100,000 $ 72,000
Legal $ 75,000 $ 20,000
Fixed costs are allocated on the basis of budgeted capacity.
Variable costs are allocated on the basis of actual usage.
The direct method is used to allocate service department costs to operating departments.
Also do this problem assuming the step-down/dual and then the reciprocal/dual methods.
* In other problems, always remember to ignore self service.
(also called: simultaneous, cross-allocation, matrix-allocation, or double-distribution method)
Mf = 100,000 + 0.05Lf and Lf = 75,000 + 0.1Mf
(each depts. fixed cost plus proportion it uses of the other support departments support)
Mv = 72,000 + 0.1 Lv and Lv = 20,000 + 0.1Mv
Two methods for allocating common costs are:
1. Stand-alone cost
2. Incremental cost
A consultant in Tampa is planning to go to
Chicago and meet with an international client.
The round-trip Tampa/Chicago/Tampa
airfare costs $540.
The consultant is also planning to attend
a business meeting with a North Carolina
client in Durham.
The round-trip Tampa/Durham/Tampa
airfare costs $360.
The consultant decides to combine the two
trips into a Tampa/Durham/Chicago/Tampa
itinerary that will cost $760.
How much should the consultant charge
to the North Carolina client?
$360 ÷ ($360 + $540) = .40
.40 × $760 = $304
How much to the international client?
$760 – $304 = $456
Assume that the business meeting in Chicago
is viewed as the primary party.
What would be the cost allocation?
International client (primary) $540
Durham client (incremental) $760 – $540 = $220
A bundled product is a package of two or more
products (or services) sold for a single price.
Bundled product sales are also referred to
as “suite sales.”
The individual components of the bundle also
may be sold as separate items at their own
What businesses provide bundled products?
Allocation of the revenues of a bundled package to the individual products in that package is similar to allocation of common costs.