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**67. **??????????????????????????????????? Most large organizations have both operating departments and service departments. The central purposes of the organization are carried out in the operating departments. In contrast, service departments do not directly engage in operating activities. This chapter discusses why and how service department costs are allocated to operating departments.Most large organizations have both operating departments and service departments. The central purposes of the organization are carried out in the operating departments. In contrast, service departments do not directly engage in operating activities. This chapter discusses why and how service department costs are allocated to operating departments.

**68. **??????????????????????? The allocation bases used should drive the cost being allocated. For example, when allocating costs of the employee cafeteria, the number of meals served would be a good choice for the allocation base.
The allocation bases used should drive the cost being allocated. For example, when allocating costs of the employee cafeteria, the number of meals served would be a good choice for the allocation base.

**69. **???????????????????????????? ?????????????????????????????????
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**70. **??????????????????????? A service department’s costs may be allocated using more than one base. For example, the costs of a human resource department might be divided into two parts, with one part allocated based on number of employees in each operating department and the other part allocated on the basis of hours spent in training programs run by the human resource department.
A service department’s costs may be allocated using more than one base. For example, the costs of a human resource department might be divided into two parts, with one part allocated based on number of employees in each operating department and the other part allocated on the basis of hours spent in training programs run by the human resource department.

**71. **????????????????????????????????????????????? Costs that can be traced directly to specific segments of a company should not be allocated to other segments. Rather, such costs should be charged directly to the responsible segment. For example, the rent for a branch office of an insurance company should be charged directly against the branch office rather than included in a company-wide overhead pool and then spread throughout the company.
Some companies allocate costs to segments using arbitrary bases. Costs should be allocated to segments for internal decision making purposes only when the allocation base actually drives the cost being allocated. For example, Sales is frequently used to allocate S, G, and A expenses to segments. This should only be done if sales drive S, G and A expenses. Costs that can be traced directly to specific segments of a company should not be allocated to other segments. Rather, such costs should be charged directly to the responsible segment. For example, the rent for a branch office of an insurance company should be charged directly against the branch office rather than included in a company-wide overhead pool and then spread throughout the company.
Some companies allocate costs to segments using arbitrary bases. Costs should be allocated to segments for internal decision making purposes only when the allocation base actually drives the cost being allocated. For example, Sales is frequently used to allocate S, G, and A expenses to segments. This should only be done if sales drive S, G and A expenses.

**72. **???????????????????????? Service provided between service departments are known as interdepartmental or reciprocal services. Three approaches may be used to allocate the costs of service departments to other departments. These approaches are known as the direct method, the step method, and the reciprocal method.Service provided between service departments are known as interdepartmental or reciprocal services. Three approaches may be used to allocate the costs of service departments to other departments. These approaches are known as the direct method, the step method, and the reciprocal method.

**73. **Direct Method The direct method is the simplest of the three cost allocation methods because it ignores the services provided by a service department to other service departments. Interactions between service departments are ignored and all costs of each service department are allocated directly to operatingdepartments.The direct method is the simplest of the three cost allocation methods because it ignores the services provided by a service department to other service departments. Interactions between service departments are ignored and all costs of each service department are allocated directly to operatingdepartments.

**74. **Direct Method – ???????? In the example shown on your screen, a company has two service departments, Cafeteria and Custodial, and two operating departments, Machining and Assembly. Cafeteria costs are allocated to the operating departments based on the number of employees in each department. Custodial costs are allocated to each operating department based on the number of square feet in each operating department.In the example shown on your screen, a company has two service departments, Cafeteria and Custodial, and two operating departments, Machining and Assembly. Cafeteria costs are allocated to the operating departments based on the number of employees in each department. Custodial costs are allocated to each operating department based on the number of square feet in each operating department.

**75. **Direct Method – ???????? How much of the Cafeteria and Custodial costs should be allocated to each operating department using the direct method of cost allocation?How much of the Cafeteria and Custodial costs should be allocated to each operating department using the direct method of cost allocation?

**76. **Direct Method – ???????? Using the direct method of cost allocation, it doesn’t matter which service department we allocate first. We will start with cafeteria. The total number of employees in the allocation base is fifty, twenty for Machining plus thirty for Assembly. Recall that we ignore the number of employees in Custodial as it is a service department and using the direct method, we only allocate to operating departments. The allocation percentage is calculated by dividing the number of employees in an operating department by the total number of employees in the allocation base. For Machining, the allocation percentage is forty percent, obtained by dividing twenty employees by fifty employees. Next we multiply the allocation percentage times the service department cost. To allocate Cafeteria costs to Machining we multiply forty percent times three hundred sixty thousand dollars and get one hundred forty-four thousand dollars.Using the direct method of cost allocation, it doesn’t matter which service department we allocate first. We will start with cafeteria. The total number of employees in the allocation base is fifty, twenty for Machining plus thirty for Assembly. Recall that we ignore the number of employees in Custodial as it is a service department and using the direct method, we only allocate to operating departments. The allocation percentage is calculated by dividing the number of employees in an operating department by the total number of employees in the allocation base. For Machining, the allocation percentage is forty percent, obtained by dividing twenty employees by fifty employees. Next we multiply the allocation percentage times the service department cost. To allocate Cafeteria costs to Machining we multiply forty percent times three hundred sixty thousand dollars and get one hundred forty-four thousand dollars.

**77. **Direct Method – ???????? Next, let’s allocate Cafeteria costs to Assembly. The allocation percentage is calculated by dividing the number of employees in an operating department by the total number of employees in the allocation base. For Assembly, the allocation percentage is sixty percent, obtained by dividing thirty employees by fifty employees. To allocate Cafeteria costs to Assembly we multiply sixty percent times three hundred sixty thousand dollars and get two hundred sixteen thousand dollars.
Next, let’s allocate Cafeteria costs to Assembly. The allocation percentage is calculated by dividing the number of employees in an operating department by the total number of employees in the allocation base. For Assembly, the allocation percentage is sixty percent, obtained by dividing thirty employees by fifty employees. To allocate Cafeteria costs to Assembly we multiply sixty percent times three hundred sixty thousand dollars and get two hundred sixteen thousand dollars.

**78. **Direct Method – ???????? Now let’s allocate Custodial costs. The total number of square feet in the allocation base is seventy-five thousand, twenty-five thousand for Machining plus fifty thousand for Assembly. Recall that we ignore the square feet in Cafeteria as it is a service department and using the direct method, we only allocate to operating departments. The allocation percentage is calculated by dividing the square feet in an operating department by the total number of square feet in the allocation base. For Machining, the allocation percentage is thirty-three and one-third percent, obtained by dividing twenty-five thousand square feet by seventy-five thousand square feet. Next we multiply the allocation percentage times the service department cost. To allocate Custodial costs to Machining we multiply thirty-three and one-third percent times ninety thousand dollars and get thirty thousand dollars.
Now let’s allocate Custodial costs. The total number of square feet in the allocation base is seventy-five thousand, twenty-five thousand for Machining plus fifty thousand for Assembly. Recall that we ignore the square feet in Cafeteria as it is a service department and using the direct method, we only allocate to operating departments. The allocation percentage is calculated by dividing the square feet in an operating department by the total number of square feet in the allocation base. For Machining, the allocation percentage is thirty-three and one-third percent, obtained by dividing twenty-five thousand square feet by seventy-five thousand square feet. Next we multiply the allocation percentage times the service department cost. To allocate Custodial costs to Machining we multiply thirty-three and one-third percent times ninety thousand dollars and get thirty thousand dollars.

**79. **Direct Method – ???????? Next, let’s allocate Custodial costs to Assembly. The total number of square feet in the allocation base is seventy-five thousand, twenty-five thousand for Machining plus fifty thousand for Assembly. The allocation percentage is calculated by dividing the square feet in an operating department by the total number of square feet in the allocation base. For Assembly, the allocation percentage is sixty-six and two-thirds percent, obtained by dividing fifty thousand square feet by seventy-five thousand square feet. Next we multiply the allocation percentage times the service department cost. To allocate Custodial costs to Assembly we multiply sixty-six and two-thirds percent times ninety thousand dollars and get sixty thousand dollars.
Next, let’s allocate Custodial costs to Assembly. The total number of square feet in the allocation base is seventy-five thousand, twenty-five thousand for Machining plus fifty thousand for Assembly. The allocation percentage is calculated by dividing the square feet in an operating department by the total number of square feet in the allocation base. For Assembly, the allocation percentage is sixty-six and two-thirds percent, obtained by dividing fifty thousand square feet by seventy-five thousand square feet. Next we multiply the allocation percentage times the service department cost. To allocate Custodial costs to Assembly we multiply sixty-six and two-thirds percent times ninety thousand dollars and get sixty thousand dollars.

**80. **Step Method The step method provides for the allocation of a service department’s costs to other service departments, as well as to operating departments. It is a sequential allocation procedure, and the sequence usually begins with the service department that provides the greatest amount of service to other service departments. Once a service department’s costs have been allocated to other departments, other service department costs are not allocated back to it. The step method provides for the allocation of a service department’s costs to other service departments, as well as to operating departments. It is a sequential allocation procedure, and the sequence usually begins with the service department that provides the greatest amount of service to other service departments. Once a service department’s costs have been allocated to other departments, other service department costs are not allocated back to it.

**81. **Step Method ???? step method ?????? 3 ????????:
? ????????????????????????????????????????????????????????? ????????????????????? direct ??? step
? ????????????????????????????????????????????????????????????
? ?????????????????????????????????????????????????????????????????????????????????????????????????????????????????? There are three key points to understand regarding the step method:
? In both the direct and step methods, any amount of the allocation base attributable to the service department whose cost is being allocated is always ignored.
? Any amount of the allocation base that is attributable to a service department whose cost has already been allocated is ignored.
? Each service department assigns its own costs to operating departments plus the costs that have been allocated to it from other service departments.
There are three key points to understand regarding the step method:
? In both the direct and step methods, any amount of the allocation base attributable to the service department whose cost is being allocated is always ignored.
? Any amount of the allocation base that is attributable to a service department whose cost has already been allocated is ignored.
? Each service department assigns its own costs to operating departments plus the costs that have been allocated to it from other service departments.

**82. **Step Method – ???????? We will use the same information shown on your screen for the step-method example. There are two service departments, Cafeteria and Custodial, and two operating departments, Machining and Assembly. Cafeteria costs are allocated to the operating departments based on the number of employees in each department. Custodial costs are allocated to each operating department based on the number of square feet in each operating department.
We will use the same information shown on your screen for the step-method example. There are two service departments, Cafeteria and Custodial, and two operating departments, Machining and Assembly. Cafeteria costs are allocated to the operating departments based on the number of employees in each department. Custodial costs are allocated to each operating department based on the number of square feet in each operating department.

**83. **Step Method – ???????? How much of the Cafeteria and Custodial costs should be allocated to each operating department using the step method of cost allocation?
We will allocate Cafeteria first since it is larger and provides more service to Custodial than Custodial provides to Cafeteria.
How much of the Cafeteria and Custodial costs should be allocated to each operating department using the step method of cost allocation?
We will allocate Cafeteria first since it is larger and provides more service to Custodial than Custodial provides to Cafeteria.

**84. **Step Method – ???????? The total number of employees in the allocation base is sixty, ten for Custodial plus twenty for Machining plus thirty for Assembly. The allocation percentage is calculated by dividing the number of employees in a department by the total number of employees in the allocation base. For Custodial, the allocation percentage is sixteen and two-thirds percent, obtained by dividing ten employees by sixty employees. Next we multiply the allocation percentage times the service department cost. To allocate Cafeteria costs to Custodial, we multiply sixteen and two-thirds percent times three hundred sixty thousand dollars and get sixty thousand dollars.
The total number of employees in the allocation base is sixty, ten for Custodial plus twenty for Machining plus thirty for Assembly. The allocation percentage is calculated by dividing the number of employees in a department by the total number of employees in the allocation base. For Custodial, the allocation percentage is sixteen and two-thirds percent, obtained by dividing ten employees by sixty employees. Next we multiply the allocation percentage times the service department cost. To allocate Cafeteria costs to Custodial, we multiply sixteen and two-thirds percent times three hundred sixty thousand dollars and get sixty thousand dollars.

**85. **Step Method – ???????? Next, let’s allocate Cafeteria costs to Machining. The allocation percentage is calculated by dividing the number of employees in a department by the total number of employees in the allocation base. For Machining, the allocation percentage is thirty-three and one-third percent, obtained by dividing twenty employees by sixty employees. Next we multiply the allocation percentage times the service department cost. To allocate Cafeteria costs to Machining, we multiply thirty-three and one-third percent times three hundred sixty thousand dollars and get one hundred twenty thousand dollars.
Next, let’s allocate Cafeteria costs to Machining. The allocation percentage is calculated by dividing the number of employees in a department by the total number of employees in the allocation base. For Machining, the allocation percentage is thirty-three and one-third percent, obtained by dividing twenty employees by sixty employees. Next we multiply the allocation percentage times the service department cost. To allocate Cafeteria costs to Machining, we multiply thirty-three and one-third percent times three hundred sixty thousand dollars and get one hundred twenty thousand dollars.

**86. **Step Method – ???????? Next, let’s allocate Cafeteria costs to Assembly. The allocation percentage is calculated by dividing the number of employees in a department by the total number of employees in the allocation base. For Assembly, the allocation percentage is fifty percent, obtained by dividing thirty employees by sixty employees. Next we multiply the allocation percentage times the service department cost. To allocate Cafeteria costs to Assembly, we multiply fifty percent times three hundred sixty thousand dollars and get one hundred eighty thousand dollars.
Next, let’s allocate Cafeteria costs to Assembly. The allocation percentage is calculated by dividing the number of employees in a department by the total number of employees in the allocation base. For Assembly, the allocation percentage is fifty percent, obtained by dividing thirty employees by sixty employees. Next we multiply the allocation percentage times the service department cost. To allocate Cafeteria costs to Assembly, we multiply fifty percent times three hundred sixty thousand dollars and get one hundred eighty thousand dollars.

**87. **Step Method – ???????? Now, we can allocate Custodial costs. The costs in Custodial are now $150,000. This amount includes the department’s own costs of $90,000 plus the $60,000 allocated from Cafeteria. None of the $150,000 will be allocated back to Cafeteria. How much of the Custodial costs should be allocated to each operating department using the step method of cost allocation?Now, we can allocate Custodial costs. The costs in Custodial are now $150,000. This amount includes the department’s own costs of $90,000 plus the $60,000 allocated from Cafeteria. None of the $150,000 will be allocated back to Cafeteria. How much of the Custodial costs should be allocated to each operating department using the step method of cost allocation?

**88. **Step Method – ???????? The total number of square feet in the allocation base is seventy-five thousand, twenty-five thousand for Machining plus fifty thousand for Assembly. The allocation percentage is calculated by dividing the square feet in a department by the total number of square feet in the allocation base. For Machining, the allocation percentage is thirty-three and one-third percent, obtained by dividing twenty-five thousand square feet by seventy-five thousand square feet. Next we multiply the allocation percentage times the service department cost. To allocate Custodial costs to Machining we multiply thirty-three and one-third percent times one hundred fifty thousand dollars and get fifty thousand dollars.
The total number of square feet in the allocation base is seventy-five thousand, twenty-five thousand for Machining plus fifty thousand for Assembly. The allocation percentage is calculated by dividing the square feet in a department by the total number of square feet in the allocation base. For Machining, the allocation percentage is thirty-three and one-third percent, obtained by dividing twenty-five thousand square feet by seventy-five thousand square feet. Next we multiply the allocation percentage times the service department cost. To allocate Custodial costs to Machining we multiply thirty-three and one-third percent times one hundred fifty thousand dollars and get fifty thousand dollars.

**89. **Step Method – ???????? Next, let’s allocate Custodial costs to Assembly. The total number of square feet in the allocation base is seventy-five thousand, twenty-five thousand for Machining plus fifty thousand for Assembly. The allocation percentage is calculated by dividing the square feet in an operating department by the total number of square feet in the allocation base. For Assembly, the allocation percentage is sixty-six and two-thirds percent, obtained by dividing fifty thousand square feet by seventy-five thousand square feet. Next we multiply the allocation percentage times the service department cost. To allocate Custodial costs to Assembly we multiply sixty-six and two-thirds percent times one hundred fifty thousand dollars and get one hundred thousand dollars.
Next, let’s allocate Custodial costs to Assembly. The total number of square feet in the allocation base is seventy-five thousand, twenty-five thousand for Machining plus fifty thousand for Assembly. The allocation percentage is calculated by dividing the square feet in an operating department by the total number of square feet in the allocation base. For Assembly, the allocation percentage is sixty-six and two-thirds percent, obtained by dividing fifty thousand square feet by seventy-five thousand square feet. Next we multiply the allocation percentage times the service department cost. To allocate Custodial costs to Assembly we multiply sixty-six and two-thirds percent times one hundred fifty thousand dollars and get one hundred thousand dollars.

**90. **Reciprocal Method The reciprocal method gives full recognition to interdepartmental services. While the step method only allocates forward – never backwards – the reciprocal method allocates service department costs in both directions. Reciprocal allocation requires the use of simultaneous linear equations and is beyond the scope of our discussion.
The reciprocal method is rarely used in practice because of its complexity and because the results are usually close to the step method results. The reciprocal method gives full recognition to interdepartmental services. While the step method only allocates forward – never backwards – the reciprocal method allocates service department costs in both directions. Reciprocal allocation requires the use of simultaneous linear equations and is beyond the scope of our discussion.
The reciprocal method is rarely used in practice because of its complexity and because the results are usually close to the step method results.

**91. **??????????????? Direct ??????? Step On your screen, you see information for a series of questions. The first cost allocation questions use the direct method. You will probably want to refer back to this screen as you work through the questions. On your screen, you see information for a series of questions. The first cost allocation questions use the direct method. You will probably want to refer back to this screen as you work through the questions.

**92. **????? ? ??????????????????????????????????????????????????????????????
a. $ 36,000
b. $144,000
c. $180,000
d. $ 27,000 Here’s your first question using the direct method of service department cost allocation.Here’s your first question using the direct method of service department cost allocation.

**93. ** ??????????????????????????????????????????????????????????????
a. $ 36,000
b. $144,000
c. $180,000
d. $ 27,000 ????? ? The total number of employees in the allocation base is one hundred, twenty in Accounting plus eighty others. Recall that we ignore the number of employees in BACS as it is a service department and using the direct method, we only allocate to operating departments. The allocation percentage is calculated by dividing the number of employees in an operating department by the total number of employees in the allocation base. For Accounting, the allocation percentage is twenty percent, obtained by dividing twenty employees by one hundred employees. Next we multiply the allocation percentage times the service department cost. To allocate ADMIN costs to Accounting we multiply twenty percent times one hundred eighty thousand dollars and get thirty-six thousand dollars.
The total number of employees in the allocation base is one hundred, twenty in Accounting plus eighty others. Recall that we ignore the number of employees in BACS as it is a service department and using the direct method, we only allocate to operating departments. The allocation percentage is calculated by dividing the number of employees in an operating department by the total number of employees in the allocation base. For Accounting, the allocation percentage is twenty percent, obtained by dividing twenty employees by one hundred employees. Next we multiply the allocation percentage times the service department cost. To allocate ADMIN costs to Accounting we multiply twenty percent times one hundred eighty thousand dollars and get thirty-six thousand dollars.

**94. ** ?????????????????????????????????????????????????????????????????????????????????????
a. $ 52,500
b. $135,000
c. $270,000
d. $ 49,500 ????? ? Here’s your second question using the direct method of service department cost allocation.
Here’s your second question using the direct method of service department cost allocation.

**95. ** ?????????????????????????????????????????????????????????????????????????????????????
a. $ 52,500
b. $135,000
c. $270,000
d. $ 49,500 Quick Check ? We will allocate BACS costs to Accounting and add the result to the answer for the previous question. BACS is allocated on the basis of the number of personal computers in each operating department. The total number of personal computers in the allocation base is one hundred twenty, eighteen for Accounting plus one hundred two others. The allocation percentage is calculated by dividing the number of personal computers in an operating department by the total number of personal computers in the allocation base. For Accounting, the allocation percentage is fifteen percent, obtained by dividing eighteen personal computers by one hundred twenty personal computers. To allocate BACS costs to Accounting, we multiply fifteen percent times ninety thousand dollars and get thirteen thousand five hundred dollars. The total amount allocated to Accounting is the sum of thirty-six thousand dollars and thirteen thousand five hundred dollars for a total of forty-nine thousand five hundred dollars.
We will allocate BACS costs to Accounting and add the result to the answer for the previous question. BACS is allocated on the basis of the number of personal computers in each operating department. The total number of personal computers in the allocation base is one hundred twenty, eighteen for Accounting plus one hundred two others. The allocation percentage is calculated by dividing the number of personal computers in an operating department by the total number of personal computers in the allocation base. For Accounting, the allocation percentage is fifteen percent, obtained by dividing eighteen personal computers by one hundred twenty personal computers. To allocate BACS costs to Accounting, we multiply fifteen percent times ninety thousand dollars and get thirteen thousand five hundred dollars. The total amount allocated to Accounting is the sum of thirty-six thousand dollars and thirteen thousand five hundred dollars for a total of forty-nine thousand five hundred dollars.

**96. **????? Now we will look at a question where we will use the step method of service department cost allocation. The information on your screen for this question is the same information that we used for the direct method questions.Now we will look at a question where we will use the step method of service department cost allocation. The information on your screen for this question is the same information that we used for the direct method questions.

**97. ** ?????????????????????????????????????????????????????????????????????????????????????
a. $35,250
b. $49,072
c. $18,000
d. $26,333 ????? ? Here’s your question using the step method of service department cost allocation.
Here’s your question using the step method of service department cost allocation.

**98. ** ?????????????????????????????????????????????????????????????????????????????????????
a. $35,250
b. $49,072
c. $18,000
d. $26,333 ????? ? ADMIN provides more services than BACS so we allocate it first. The total number of employees in the allocation base is one hundred five, five for BACS, plus twenty for Accounting, plus eighty others. The allocation percentage is calculated by dividing the number of employees in a department by the total number of employees in the allocation base. For Accounting, the allocation percentage is found by dividing twenty employees by one hundred five employees. Next we multiply the allocation percentage times the service department cost. To allocate ADMIN costs to Accounting we multiply the allocation percentage times one hundred eighty thousand dollars and get thirty-four thousand two hundred eighty-six dollars.
We must also allocate ADMIN costs to BACS. The allocation percentage is found by dividing five employees by one hundred five employees. Next we multiply the allocation percentage times the service department cost. To allocate ADMIN costs to BACS, we multiply the allocation percentage times one hundred eighty thousand dollars and get eight thousand five hundred seventy-one dollars.
The new amount to be allocated from BACS is the original ninety thousand dollars plus the eight thousand five hundred seventy-one dollars, for a total of ninety-eight thousand five hundred seventy-one dollars.
Now we can allocate BACS costs to Accounting. For BACS, the allocation percentage of fifteen percent is found by dividing eighteen computers by one hundred twenty computers. Next we multiply the allocation percentage times the service department cost. To allocate BACS costs to Accounting, we multiply fifteen percent times ninety-eight thousand five hundred seventy-one dollars and get fourteen thousand seven hundred eighty-six dollars.
The total amount allocated to Accounting is the sum of thirty-four thousand two hundred eighty-six dollars plus fourteen thousand seven hundred eighty-six dollars.ADMIN provides more services than BACS so we allocate it first. The total number of employees in the allocation base is one hundred five, five for BACS, plus twenty for Accounting, plus eighty others. The allocation percentage is calculated by dividing the number of employees in a department by the total number of employees in the allocation base. For Accounting, the allocation percentage is found by dividing twenty employees by one hundred five employees. Next we multiply the allocation percentage times the service department cost. To allocate ADMIN costs to Accounting we multiply the allocation percentage times one hundred eighty thousand dollars and get thirty-four thousand two hundred eighty-six dollars.
We must also allocate ADMIN costs to BACS. The allocation percentage is found by dividing five employees by one hundred five employees. Next we multiply the allocation percentage times the service department cost. To allocate ADMIN costs to BACS, we multiply the allocation percentage times one hundred eighty thousand dollars and get eight thousand five hundred seventy-one dollars.
The new amount to be allocated from BACS is the original ninety thousand dollars plus the eight thousand five hundred seventy-one dollars, for a total of ninety-eight thousand five hundred seventy-one dollars.
Now we can allocate BACS costs to Accounting. For BACS, the allocation percentage of fifteen percent is found by dividing eighteen computers by one hundred twenty computers. Next we multiply the allocation percentage times the service department cost. To allocate BACS costs to Accounting, we multiply fifteen percent times ninety-eight thousand five hundred seventy-one dollars and get fourteen thousand seven hundred eighty-six dollars.
The total amount allocated to Accounting is the sum of thirty-four thousand two hundred eighty-six dollars plus fourteen thousand seven hundred eighty-six dollars.

**99. **???????????????????????????????????????? While sales dollars is a popular allocation base for service department costs, it is a poor choice because sales dollars fluctuate from period to period, and the costs being allocated are often largely fixed. Allocation of service department costs based on sales can create a situation where the sales of one departmentinfluence the service department costs allocated to other departments.
While sales dollars is a popular allocation base for service department costs, it is a poor choice because sales dollars fluctuate from period to period, and the costs being allocated are often largely fixed. Allocation of service department costs based on sales can create a situation where the sales of one departmentinfluence the service department costs allocated to other departments.

**100. **Clothier Inc. – ???????? Let’s look at an example to illustrate the pitfalls of allocating service department costs based on sales revenue.
Clothier Inc., a men’s clothing store has one service department and three sales departments, Suits, Shoes, and Accessories. Service department costs total $60,000 for both years in the example. Contrary to good practice, Clothier allocates the service department costs based on sales.
Let’s look at an example to illustrate the pitfalls of allocating service department costs based on sales revenue.
Clothier Inc., a men’s clothing store has one service department and three sales departments, Suits, Shoes, and Accessories. Service department costs total $60,000 for both years in the example. Contrary to good practice, Clothier allocates the service department costs based on sales.

**101. **Clothier Inc. – ???????????????????? Part I
We will focus on the Suit Department in this example. In the first year, Suit Department sales are two hundred sixty thousand dollars of the four hundred thousand dollars of total sales. Two hundred sixty thousand dollars is sixty-five percent of four hundred thousand dollars. We allocate the service department costs to the Suit Department by multiplying sixty-five percent times sixty thousand dollars. The result is thirty-nine thousand dollars.
Part II
In the next year, the manager of the Suit Department increased sales by $100,000. Sales in the other departments are unchanged. Let’s allocate the $60,000 service department cost for the second year given the sales increase.
Part I
We will focus on the Suit Department in this example. In the first year, Suit Department sales are two hundred sixty thousand dollars of the four hundred thousand dollars of total sales. Two hundred sixty thousand dollars is sixty-five percent of four hundred thousand dollars. We allocate the service department costs to the Suit Department by multiplying sixty-five percent times sixty thousand dollars. The result is thirty-nine thousand dollars.
Part II
In the next year, the manager of the Suit Department increased sales by $100,000. Sales in the other departments are unchanged. Let’s allocate the $60,000 service department cost for the second year given the sales increase.

**102. **Clothier Inc. – ??????????????? 2 In the second year, Suit Department sales are three hundred sixty thousand dollars of the five hundred thousand dollars of total sales. Three hundred sixty thousand dollars is seventy-two percent of five hundred thousand dollars. We allocate the service department costs to the Suit Department by multiplying seventy-two percent times sixty thousand dollars. The result is forty-three thousand two hundred dollars.
The allocation of service department costs to the Suit Department increased by four thousand two hundred dollars. The allocation of service department costs to the other two departments decreased. The Suit Department manager is likely to complain because as a result of his efforts to expand sales, his department is being forced to bear a larger share of service department costs.In the second year, Suit Department sales are three hundred sixty thousand dollars of the five hundred thousand dollars of total sales. Three hundred sixty thousand dollars is seventy-two percent of five hundred thousand dollars. We allocate the service department costs to the Suit Department by multiplying seventy-two percent times sixty thousand dollars. The result is forty-three thousand two hundred dollars.
The allocation of service department costs to the Suit Department increased by four thousand two hundred dollars. The allocation of service department costs to the other two departments decreased. The Suit Department manager is likely to complain because as a result of his efforts to expand sales, his department is being forced to bear a larger share of service department costs.

**104. **???????????????????????? ??????????????????????????????????????? ???
???????????????????????????
???????????????? A responsibility accounting system enables management to react quickly to deviations from their plans and to learn from feedback obtained by comparing budgeted goals to actual results.
A responsibility accounting system enables management to react quickly to deviations from their plans and to learn from feedback obtained by comparing budgeted goals to actual results.

**105. **????????????? A standard is a benchmark or “norm” for measuring performance. In managerial accounting, two types of standards are commonly used by manufacturing, service, food and not-for-profit organizations:
? Quantity standards specify how much of an input should be used to make a product or provide a service. For example: a. Auto service centers like Firestone and Sears set labor time standards for the completion of work tasks. b. Fast-food outlets such as McDonald’s have exacting standards for the quantity of meat used in a sandwich.
? Cost (price) standards specify how much should be paid for each unit of the input. For example: a. Hospitals have standard costs for food, laundry, and other items. b. Home construction companies have standard labor costs that they apply to sub-contractors such as framers, roofers, and electricians.
A standard is a benchmark or “norm” for measuring performance. In managerial accounting, two types of standards are commonly used by manufacturing, service, food and not-for-profit organizations:
? Quantity standards specify how much of an input should be used to make a product or provide a service. For example: a. Auto service centers like Firestone and Sears set labor time standards for the completion of work tasks. b. Fast-food outlets such as McDonald’s have exacting standards for the quantity of meat used in a sandwich.
? Cost (price) standards specify how much should be paid for each unit of the input. For example: a. Hospitals have standard costs for food, laundry, and other items. b. Home construction companies have standard labor costs that they apply to sub-contractors such as framers, roofers, and electricians.

**106. **????????????? Management by exception is a system of management in which standards are set for various operating activities, with actual results compared to these standards. Any deviations that are deemed significant are brought to the attention of management as “exceptions.” In this chapter, we will apply the management by exception principle to quantity and cost (price) standards with an emphasis on manufacturing applications.Management by exception is a system of management in which standards are set for various operating activities, with actual results compared to these standards. Any deviations that are deemed significant are brought to the attention of management as “exceptions.” In this chapter, we will apply the management by exception principle to quantity and cost (price) standards with an emphasis on manufacturing applications.

**107. **??????????????????????????? The variance analysis cycle is a continuous five-step process:
The cycle begins with the preparation of standard cost performance reportsin the accounting department.
These reports highlight variances that are differences between actual results and what should have occurred according to standards.
Variances raise questions such as:a. Why did this variance occur?b. Why is this variance larger than it was last period?
Significant variances are investigated to discover their root causes.
Corrective actions are taken and the next period’s operations are carried out.
Our objective is to correct problems that caused unfavorable variances and to possibly adopt and reward the practices that resulted in favorable variances.
The variance analysis cycle is a continuous five-step process:
The cycle begins with the preparation of standard cost performance reportsin the accounting department.
These reports highlight variances that are differences between actual results and what should have occurred according to standards.
Variances raise questions such as:a. Why did this variance occur?b. Why is this variance larger than it was last period?
Significant variances are investigated to discover their root causes.
Corrective actions are taken and the next period’s operations are carried out.
Our objective is to correct problems that caused unfavorable variances and to possibly adopt and reward the practices that resulted in favorable variances.

**108. ** ????????, ??????, ??????????? ??????????????????? ???????????????????????????????????????????????????????????????????? ????????????????????? Setting price and quantity standards requires the combined expertise of everyone who has responsibility for purchasing and using inputs. In a manufacturing setting, this might include managerial accountants, engineers, purchasing managers, production managers, line managers, and production workers. Standards should be designed to encourage efficient future operations, not just a repetition of past inefficient operations.Setting price and quantity standards requires the combined expertise of everyone who has responsibility for purchasing and using inputs. In a manufacturing setting, this might include managerial accountants, engineers, purchasing managers, production managers, line managers, and production workers. Standards should be designed to encourage efficient future operations, not just a repetition of past inefficient operations.

**109. **????????????????????? Ideal standards can only be attained under the best of circumstances. They allow for no work interruptions, and they require employees to continually work at one hundred percent peak efficiency.
Practical standards are tight but attainable. They allow for normal machine downtime and employee rest periods and can be attained through reasonable, highly efficient efforts of the average worker. Practical standards can also be used for forecasting cash flows and in planning inventory.Ideal standards can only be attained under the best of circumstances. They allow for no work interruptions, and they require employees to continually work at one hundred percent peak efficiency.
Practical standards are tight but attainable. They allow for normal machine downtime and employee rest periods and can be attained through reasonable, highly efficient efforts of the average worker. Practical standards can also be used for forecasting cash flows and in planning inventory.

**110. **??????? vs. ???????? As we’ve seen, a budget deals with total costs. Standards are calculated on a per unit basis and can be viewed as the budgeted cost for one unit of product. Standards are often used in the preparation of budgets.
As we’ve seen, a budget deals with total costs. Standards are calculated on a per unit basis and can be viewed as the budgeted cost for one unit of product. Standards are often used in the preparation of budgets.

**111. **????????????????????????????????????????????? All variances are not worth investigating. Methods for highlighting a subset of variances as exceptions include:
Looking at the size of the variance.
Looking at the size of the variance relative to the amount of spending. All variances are not worth investigating. Methods for highlighting a subset of variances as exceptions include:
Looking at the size of the variance.
Looking at the size of the variance relative to the amount of spending.