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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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Presentation Transcript
today s quote
Today’s quote
  • Any idiot can face a crisis: It is this day-to-day living that wears you out.

--Anton Chekhov

overview
Overview
  • Allocation of support department costs
    • Example of 3 ways
  • Allocation of Common Costs
    • Example of 2 ways
  • Allocation of Revenues from Bundled products/services
operating vs support departments
Operating vs. Support Departments

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.

single rate and dual rate methods
Single-Rate andDual-Rate Methods

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 versus actual rates
Budgeted versus Actual Rates

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.

Why?

budgeted versus actual usage allocation bases
Budgeted versus ActualUsage Allocation Bases

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.

allocating support departments costs 3 methods
Allocating SupportDepartments Costs—3 methods

Direct method:

Allocates support department costs to operating

departments only.

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

support departments.

allocating support departments costs in class example
Allocating SupportDepartments Costs—in-class example

John Deere Tractors, Inc. has two

support departments and two operating departments.

Maintenance

and

Legal

Implements

and

Engines

allocating support departments costs do in class
Allocating SupportDepartments Costs (do in class)

Budgeted Capacity .

To be supplied by:MaintenanceLegalImplementsEngines

Maintenance 10% 40% 50%

Legal 5% 60% 35%

Actual Usage .

Supplied by:MaintenanceLegalImplementsEngines

Maintenance 10% 30% 60%

Legal 10% 70% 20%

Actual costs were:

FixedVariable

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.

reciprocal method equations
Reciprocal Method--equations
  • For each cost (fixed and variable if dual rate or just total cost if single rate) you have to solve a set of equations for the unknown “artificial cost” of each support department.
  • Example in class

(also called: simultaneous, cross-allocation, matrix-allocation, or double-distribution method)

reciprocal equations
Reciprocal equations
  • For fixed costs:

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)

  • For variable costs:

Mv = 72,000 + 0.1 Lv and Lv = 20,000 + 0.1Mv

allocating common costs
Allocating Common Costs

Two methods for allocating common costs are:

1. Stand-alone cost

allocation method

2. Incremental cost

allocation method

stand alone example
Stand-Alone Example

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.

stand alone example18
Stand-Alone Example

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.

stand alone example19
Stand-Alone Example

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

incremental cost example
Incremental Cost Example

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

revenues and bundled products
Revenues and Bundled Products

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

“stand-alone” prices.

revenues and bundled products22
Revenues and Bundled Products

What businesses provide bundled products?

Banks

Hotels

Tours

  • Checking
  • Safety

deposit boxes

  • Investment

advisory

  • Lodging
  • Food and

beverage

services

  • Recreation
  • Transportation
  • Lodging
  • Guides
allocation of revenues
Allocation of Revenues

Allocation of the revenues of a bundled package to the individual products in that package is similar to allocation of common costs.

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