ACCT 361
Chapter 15
Period Cost Application
Purposes of Period Cost Application
1. To provide information for economic
decisions
2. To motivate managers and other employees
3. To justify costs or compute reimbursement
amounts
Allocating Support
Departments 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.
Allocating Support
Departments 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.
Direct Method - Concept
Step-Down Method - Concept
Reciprocal Method - Concept
Allocating Support
Departments Costs
The Canton Division of Smith Corporation has two
operating departments and two support departments.
Assembly Maintenance
and and
Finishing Human Resources
Allocating Support
Departments 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.
Allocating Support
Departments Costs
Human
Maintenance Resources
Budgeted costs
before allocations: $300,000 $2,160,000
Square feet: 5,000 30,000
Number of employees: 8 15
Allocating Support
Departments Costs
Assembly Finishing
Budgeted costs
before allocations: $1,700,000 $900,000
Square feet: 110,000 110,000
Number of employees: 48 24
Direct Method
Support Departments Operating Departments
Maintenance 110/220 $1,700,000
$300,000 Assembly
0% 0%
Human 24/72 $900,000
Resources
$2,160,000 Finishing
Direct Method
Support Departments Operating Departments
Maintenance $150,000 $1,700,000
$300,000 Assembly
0% 0%
Human $720,000 $900,000
Resources
$2,160,000 Finishing
Direct Method
Assembly Finishing
Original costs: $1,700,000 $ 900,000
Maintenance Allocated: 150,000 150,000
Human Resources
Allocated: 1,440,000 720,000
Total $3,290,000 $1,770,000
15-24 page 626
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
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
Step-Down Method
Costs before Allocated
allocation costs
Maintenance: $ 300,000 ($300,000)
Human Resources: $2,160,000 $ 36,000
Assembly: $1,700,000 $132,000
Finishing: $ 900,000 $132,000
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
Step-Down Method
Costs before Allocated Allocated
allocation costs costs
Human
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
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
15-24 contd.
Reciprocal
M HR A F
Maintenance – 12% 44% 44%
Human Resources 10% – 60% 30%
Maintenance cost = $300,000 + .10P
Human Resource cost = $2,160,000 + .12M
Reciprocal
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
Reciprocal
M HR A F
Before
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 $3,263,400 $1,796,599
Total cost Assembly Department: $3,263,400
Total cost Finishing Department: $1,796,599
15-25 page 626
Choosing Between Methods
Reciprocal is the most precise
Direct and Step-Down are simple to compute
and understand
Direct Method is widely used
Allocating Common Costs
Common Cost – the cost of operating a
facility, activity, or like cost object that is
shared by two or more users at a lower cost
than the individual cost of the activity to each
user
Methods of Allocating
Common Costs
Stand-Alone Cost-Allocation Method – uses
information pertaining to each user of a cost
object as a separate entity to determine the
cost-allocation weights
Individual costs are added together and
allocation percentages are calculated from
the whole, and applied to the common cost
Stand-Alone Example
A consultant in Calgary is planning to go to
Toronto and meet with an international client.
The round-trip Calgary/Toronto/Calgary
airfare costs $540.
The consultant is also planning to attend
a business meeting with a Manitoba
client in Winnipeg.
Stand-Alone Example
The round-trip Calgary/Winnipeg/Calgary
airfare costs $360.
The consultant decides to combine the two
trips into a Calgary/Winnipeg/Toronto/Calgary
itinerary that will cost $760.
Stand-Alone Example
How much should the consultant charge
to the Manitoba client?
$360 ÷ ($360 + $540) = .40
.40 × $760 = $304
How much to the international client?
$760 – $304 = $456
Methods of Allocating
Common Costs
Incremental Cost-Allocation Method ranks the individual users of
a cost object in the order of users most responsible for a
common cost and then uses this ranking to allocate the cost
among the users
The first ranked user is the Primary User and is allocated
costs up to the costs of the primary user as a stand-alone
user (typically gets the highest allocation of the common
costs)
The second ranked user is the First Incremental User and is
allocated the additional cost that arises from two users rather
than one
Subsequent users handled in the same manner as the
second ranked user
Incremental Cost Example
Assume that the business meeting in Toronto
is viewed as the primary party.
What would be the cost allocation?
International client (primary) $540
Winnipeg client (incremental) $760 – $540 =$220