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Support Department Cost Allocation. CHAPTER. Objectives. 1. Describe the difference between support departments and producing departments. 2. Calculate single and multiple changing rates for a support department.

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slide2

Objectives

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.

After studying this chapter, you should be able to:

slide3

Types of Departments

Producing departments are directly responsible for creating the products or services sold to customers.

slide4

Types of Departments

Supporting departments provide essential support services for producing departments.

Maintenance, grounds, engineering, personnel, storage

slide5

Steps in Allocating Support Department Costs to Producing Departments

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.

Continued

slide6

Steps in Allocating Support Department Costs to Producing Departments

5. Calculate predetermined overhead rates for the producing departments.

6. Allocate overhead costs to the units of individual products through the predetermined overhead rates.

examples of cost drivers for support departments
Examples of Cost Drivers forSupport Departments

Support Department Possible Driver

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

slide8

Objectives of Allocation

  • 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.
slide10

AND

Barry

Hamilton

Fixed costs……………… $26,190

Variable costs….. $0.023 per page

slide11

Variable cost: 270,000 x $0.023 $ 6,210

Fixed cost 26,190

Total cost for 270,000 pages $32,400

A Single Charge Rate

  • 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

Barry

Hamilton

Average cost ($32,400 ÷ 270,000) $0.12 per page

slide12

A Single Charge Rate

Total 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

slide13

Multiple Charging Rates

Amount Allocated to Each Department

Peak Number of Pages

Proportion of Peak Usage

Total Fixed Costs

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

slide14

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

budgeted versus actual usage
Budgeted Versus Actual Usage
  • When we allocate support-department costs to the producing departments, should we allocate actual or budgeted costs?
slide17

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.

slide18

Use of Budgeted Data for Product Costing

Total Rate

Allocated Charges

Number of Copies

x

=

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

slide19

Use of Actual Data for Performance Evaluation Purposes

Total Rate

Allocated Charges

Number of Copies

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

choosing a service department cost allocation method
Choosing A Service Department Cost Allocation Method
  • The three methods for allocating service department costs to producing departments are:
  • The Direct Method
  • The Sequential Method
  • The Reciprocal Method
slide21

Data for Illustrating Allocation Methods

  • 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.

Power Maintenance Grinding Assembly

slide22

Maintenance

Direct Method of Allocation

Power

Grinding

Assembly

slide23

Maintenance

Grinding

Direct Method of Allocation

Power

Assembly

slide24

0.75

600,000

(600,000 + 200,000)

Power =

200,000

(600,000 + 200,000)

4,500

(4,500 + 4,500)

0.25

4,500

(4,500 + 4,500)

Maintenance =

0.50

0.50

STEP 1—CALCULATE ALLOCATION RATIOS

Grinding Assembly

Direct Method

slide25

STEP 2—ALLOCATE SUPPORTS DEPARTMENT COSTS USING THE ALLOCATION RATIOS

Support Departments Producing Departments

Power Maintenance Grading Assembly

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 Method

slide26

2

1

Power

Maintenance

Sequential Method of Allocation

STEP 1: Rank service departments

slide27

Sequential Method of Allocation

STEP 2

Power

Maintenance

Grinding

Assembly

slide28

Sequential Method of Allocation

STEP 2

Maintenance

Grinding

Assembly

slide29

200,000

(200,000 + 600,000 + 200,000)

0.20

Power =

600,000

(200,000 + 600,000 + 200,000)

0.60

STEP 1—CALCULATE ALLOCATION RATIOS

Maint. Grinding Assembly

Sequential Method

slide30

Mainte- nance

4,500

(4,500 + 4,500)

=

0.50

4,500

(4,500 + 4,500)

0.50

STEP 1—CALCULATE ALLOCATION RATIOS

Maint. Grinding Assembly

Sequential Method

slide31

STEP 2—ALLOCATE SUPPORT DEPARTMENT COSTS USING THE ALLOCATION RATIOS

Support Departments Producing Departments

Power Maintenance Grading Assembly

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 Method

slide32

Reciprocal Method

  • The reciprocal method of allocation recognizes all interactions among support departments.
slide33

Reciprocal Method

Support Departments Producing Departments

Power Maintenance Grading Assembly

Direct costs:

Normal activity:

Kilowatt-hours --- 200,000 600,000 200,000

Maintenance

hours 1,000 --- 4,500 4,500

Proportion of Output Used by Departments

Power Maintenance Grading Assembly

Allocated ratios:

Power --- 0.20 0.60 0.20

Maintenance 0.10 --- 0.45 0.45

slide34

Reciprocal Method

M = Direct costs + Share of Power’s costs

M = $160,000 + $50,000 + 0.02M

0.98M = $210,000

M = $214,286

slide35

P =

Direct cost + Share of Maintenance’s cost

=

=

$250,000 + $21,429

$271,429

P

= $250,000 + 0.1($214,286)

P

P

Reciprocal Method

slide36

ALLOCATE SUPPORT DEPARTMENT COSTS USING THE ALLOCATION RATIOS AND THE SUPPORT-DEPARTMENT COSTS FROM RECIPROCAL METHODS EQUATIONS

Support Departments Producing Departments

Power Maintenance Grading Assembly

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 7-35

from Slide 7-34

slide37

Comparison of Support Department Cost Allocations Using the Direct, Sequential, and Reciprocal Methods

Direct Method

Grinding Assembly

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

Return to show

Click on button to compare with reciprocal method

slide38

Comparison of Support Department Cost Allocations Using the Direct, Sequential, and Reciprocal Methods

Sequential Method

Grinding Assembly

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

Return to show

Click on button to compare with reciprocal method

slide39

Comparison of Support Department Cost Allocations Using the Direct, Sequential, and Reciprocal Methods

Reciprocal Method

Grinding Assembly

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

Return to show

Click on button to compare with sequential method

departmental overhead rates
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
slide41

Overhead cost assigned:

2 x $5 $10

1 x $2 2

Total assigned $12

Product Unit Cost

A product requires two machine hours of grinding per unit and one hour of assembly.