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Allocation of Support Department Costs, Common Costs, and Revenues. Chapter 15 . Single-Rate and Dual-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

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Allocation of Support Department Costs, Common Costs, and Revenues

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Allocation of support department costs common costs and revenues l.jpg

Allocation of Support DepartmentCosts, Common Costs, and Revenues

Chapter 15

Single rate and dual rate methods l.jpg

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.

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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.


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Budgeted versus Actual Rates

– because the user departments do not pay for

any costs that exceed the budgeted rates

When actual rates are used for cost allocation,

managers do not know the rates to be used

until the end of the budget period.

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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.

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Allocating SupportDepartments Costs

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.

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Allocating SupportDepartments Costs

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.

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Allocating SupportDepartments Costs

The Canton Division of Smith Corporation has two

operating departments and two support departments.






Human Resources

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Allocating SupportDepartments Costs

Total square feet = 255,000

Total number of employees = 95

Maintenance is allocated using square feet.

Human Resources is allocated using

number of employees.

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Budgeted costs

before allocations:$300,000$2,160,000

Square feet: 5,000 30,000

Number of employees: 815

Allocating SupportDepartments Costs

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Budgeted costs

before allocations:$1,700,000$900,000

Square feet: 110,000 110,000

Number of employees: 48 24

Allocating SupportDepartments Costs

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Direct Method

Support Departments

Operating Departments
















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Direct Method

Support Departments

Operating Departments
















Direct method14 l.jpg


Original costs:$1,700,000$ 900,000

Maintenance Allocated:150,000 150,000

Human Resources

Allocated: 1,440,000 720,000


Direct Method

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Step-Down Method

Which support department should be allocated first?

Maintenance provides 12% of its services

to Human Resources.

Human Resources provides 10% of its

services to Maintenance.

Maintenance to Human Resources:

30,000 ÷ 250,000 (or 12%) × $300,000 = $36,000

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Step-Down Method

Maintenance to Assembly:

110,000 ÷ 250,000 (or 44%) × $300,000 = $132,000

Maintenance to Finishing:

110,000 ÷ 250,000 (or 44%) × $300,000 = $132,000

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Costs before Allocated


Maintenance:$ 300,000 ($300,000)

Human Resources:$2,160,000$ 36,000


Finishing:$ 900,000$132,000

Step-Down Method

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Step-Down Method

Human Resources costs to be allocated become

$2,160,000 + $36,000 = $2,196,000.

Human Resources to Assembly:

48 ÷ 72 × $2,196,000 = $1,464,000

Human Resources to Finishing:

24 ÷ 72 × $2,196,000 = $732,000

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Costs beforeAllocatedAllocated



Resources:$2,160,000$ 36,000($2,196,000)

Assembly:$1,700,000$132,000$ 1,464,000

Finishing:$ 900,000$132,000$ 732,000

Step-Down Method

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Step-Down Method

Total cost after allocation:

Assembly Department:

$1,700,000 + $132,000 + $1,464,000 = $3,296,000

Finishing Department:

$900,000 + $132,000 + $732,000 = $1,764,000

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Maintenance –12%44%44%

Human Resources10% –60%30%

Maintenance cost = $300,000 + .10P

Human Resource cost = $2,160,000 + .12M

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Maintenance cost (M)

= $300,000 + .10($2,160,000 + .12M)

M = $300,000 + $216,000 + .012M

.988M = $516,000  M = $522,267

HR = $2,160,000 + .12($522,267)

HR = $2,160,000 + $62,672 = $2,222,672

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allocation:$300,000 $2,160,000$1,700,000$ 900,000

Allocation: (522,267) 62,672 229,797 229,797

Allocation: 222,267($2,222,672) 1,333,603 666,802


Total cost Assembly Department:$3,263,400

Total cost Finishing Department:$1,796,599

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Overview of Methods

Overhead rate for the Assembly Department is

determined using direct labor cost as a denominator.

Overhead rate for the Finishing Department is

determined using machine-hours as the denominator.

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Comparison of Methods


Direct labor cost:$698,880$349,440

Machine-hours: 24,000 23,500

What are the various overhead rates using the three methods?

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Overhead Rates Direct Method


$3,290,000 ÷ $698,880 direct labor costs

= 471% of direct labor costs


$1,770,000 ÷ 23,500 = $75.32 per machine-hour

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Overhead RatesStep-Down Method


$3,296,000 ÷ $698,880 direct labor costs

= 472% of direct labor cost


$1,764,000 ÷ 23,500 = $75.06 per machine-hour

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Overhead Rates Reciprocal


$3,263,400 ÷ $698,880 direct labor costs

= 467% of direct labor cost


$1,796,599 ÷ 23,500 = $76.45 per machine-hour

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Comparison of Rates


Direct method:471%$75.32

Step-down method:472%$75.06

Reciprocal method:467%$76.45

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Allocating Common Costs

Two methods for allocating common cost are:

1. Stand-alone cost

allocation method

2. Incremental cost

allocation method

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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.

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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.

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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

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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

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Cost Allocation and Contracts

Many commercial contracts include clauses that

require the use of cost accounting information.

Contract disputes arise with some regularity,

often with respect to cost allocation.

Cost assignment rules should be as explicit as

possible (and in writing).

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Revenues and Bundled Products

A bundled productis 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.

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Revenues and Bundled Products

What businesses provide bundled products?




  • Checking

  • Safety

    deposit boxes

  • Investment


  • Lodging

  • Food and



  • Recreation

  • Transportation

  • Lodging

  • Guides

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Revenue Allocation Methods

English Languages Institute buys English

language software programs locally and

then sells them in Mexico and Central America.

English sells the following programs:

Grammar, Translation, and Composition

These programs are offered stand-alone

or in a bundle.

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Revenue Allocation Methods



Translation$ 85


Purchasing these software

programs costs English

the following:


Translation$ 45

Composition$ 95

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Revenue Allocation Methods

Bundle (Suites)Price

Grammar + Translation$290

Grammar + Composition$350

Grammar + Translation + Composition$410

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Revenue Allocation Methods

The two main revenue allocation methods are:

1. The stand-alone


2. The incremental


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Stand-Alone RevenueAllocation Method

There are four types of weights for the

stand-alone revenue allocation method.

1. Selling prices

2. Unit costs

3. Physical units

4. Stand-alone

product revenues

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Stand-Alone RevenueAllocation Method

Consider the Grammar and Translation

suite, which sells for $290 per day.

How much weight should English

Languages Institute assign to each item?

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Stand-Alone RevenueAllocation Method

Selling prices:

The individual selling prices are $255 for

Grammar and $85 for Translation.


$255 ÷ $340 = 0.75, $290 × 0.75 = $217.50


$85 ÷ $340 = 0.25, $290 × 0.25 = $72.50

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Stand-Alone RevenueAllocation Method

Unit costs:

This method uses the costs of the individual

products to determine the weights for the

revenue allocations.


$180 ÷ $225 = 0.80, $290 × 0.80 = $232


$45 ÷ $225 = 0.20, $290 × 0.20 = $58

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Stand-Alone RevenueAllocation Method

Physical units:

This method gives each product unit in the

suite the same weight when allocating

suite revenue to individual products.

With two products in the suite, each

product is allocated 50% of suite revenues.

1 ÷ (1 + 1) = 0.50

$290 × 0.50 = $145

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Stand-Alone RevenueAllocation Method

Stand-alone product revenues:

This method captures the quantity of each

product sold as well as their selling prices.

Assume that the stand-alone revenues in 2003

are Grammar $734,400, Translation $81,600,

and Composition $133,200.

What are the weights for the Grammar

and Translation suite?

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Stand-Alone RevenueAllocation Method


$734,400 ÷ $816,000 = 0.90, $290 × 0.90 = $261


$81,600 ÷ $816,000 = 0.10, $290 × 0.10 = $29

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Stand-Alone RevenueAllocation Method

Revenue Allocation Weights


Selling prices$217.50$ 72.50

Unit costs 232.00 58.00

Physical units 145.00 145.00

Stand-alone product revenues 261.00 29.00

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Incremental RevenueAllocation Method

The first-ranked product is termed the

primary productin the bundle.

The second-ranked product is termed

the first incremental product.

The third-ranked product is the second

incremental product, and so on.

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Incremental RevenueAllocation Method

Assume that Grammar is designated

as the primary product.

If the suite selling price exceeds the stand-

alone price of the primary product, the

primary product is allocated 100%

of its stand-alone revenue.

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Incremental RevenueAllocation Method

Grammar and Translation suite selling price

= $290 per day

Allocated to Grammar: $255

Remaining to be allocated: ($290 – $255) = $35

Allocated to Translation: $35

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