Chapter 17
Allocation of Support
Activity Costs and
Joint Costs
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Service Department Cost Allocation
First Stage Allocations
Service department costs are allocated
Service to production departments.
Department
(Cafeteria) Production
Department
Service (Machining)
Department The
(Accounting) Product
Production
Service Department
Department (Assembly)
(Personnel)
Second Stage Allocations
Production department overhead costs, plus allocated service department costs,
are applied to products using departmental predetermined overhead rates.
17-2
Selecting Allocation Bases
Personnel: Typical Custodial:
Number of Allocation Square
employees footage
Bases
Receiving: Cafeteria:
Units Number of
handled employees
Security: Accounting: Power:
Square Staff Kilowatt
footage hours hours
17-3
Selecting Allocation Bases
Criteria for
Personnel: selection Custodial:
Number of Square
employees Simplicity footage
Availability
Receiving: of space or Cafeteria:
equipment
Units Number of
handled Benefits received employees
by the production
department
Security: Power:
Accounting:
Square Kilowatt
footage Staff hours
hours
17-4
Interdepartmental Services
Service
Department Production
(Cafeteria) Department
(Machining)
POWER DEPARTMENT
Production
Service Department
Department (Assembly)
(Custodial)
17-5
Interdepartmental Services
Problem
Allocating costs when service departments
provide services to each other
Solutions
Direct Method
Step-Down Method
17-6
Direct Method
Service Production
Cost of services Department Department
between service (Cafeteria) (Machining)
departments are
ignored and all
costs are
allocated directly
to production Service Production
departments. Department Department
(Custodial) (Assembly)
For an example please see the textbook.
17-7
Step-Down Method
Service department
costs are allocated
Service Production
to other service Department Department
departments and (Cafeteria) (Machining)
to production
departments, usually
starting with the
service department
that serves the Service Production
largest number of Department Department
other service (Custodial) (Assembly)
departments.
17-8
Step-Down Method
Service Production
Department Department
Once a service
(Cafeteria) (Machining)
department’s costs
are allocated,
other service
departments’ costs
are not allocated
back to it. Service Production
Department Department
(Custodial) (Assembly)
17-9
Step-Down Method
Service Production
Department Department
Custodial will (Cafeteria) (Machining)
have a new
total to allocate
to production
departments: its
own costs plus
those costs Service Production
allocated from Department Department
the cafeteria. (Custodial) (Assembly)
For an example please see the textbook.
17-10
Dual Cost Allocation
Allocate
Charge to budgeted amounts
production to operating departments
departments at a in proportion to the
budgeted rate times long-run average
actual short-run usage of usage of the
the allocation base. allocation base.
Budgeted costs should be allocated to avoid passing on inefficiencies
from the service departments.
17-11
Dual Cost Allocation
Example
SimCo has a maintenance department and two production
departments: cutting and assembly. Variable maintenance
costs are budgeted at $0.60 per machine hour. Fixed
maintenance costs are budgeted at $200,000 per year.
Data relating to the current year are:
Long-run
Maintenance Actual
Production Usage as a Hours
Departments % of Total Used
Cutting 60% 80,000
Assembly 40% 40,000
Total 100% 120,000
Allocate maintenance costs to the two operating departments.
17-12
Dual Cost Allocation
Example
Cutting Assembly
Department Department
Variable cost allocation:
$0.60 × 80,000 hours used $ 48,000
$0.60 × 40,000 hours used $ 24,000
Fixed cost allocation
60% of $200,000 120,000
40% of $200,000 80,000
Total allocated cost $ 168,000 $ 104,000
Variable costs are allocated based on hours used.
Fixed costs are allocated based long-run average usage.
17-13
The New Manufacturing Environment
More
More accurate
accurate cost
cost tracing
tracing systems
systems
reduce
reduce the
the need
need for
for allocation
allocation
of
of indirect
indirect costs.
costs.
17-14
The Rise of Activity-Based Costing
Service First stage allocations are to
Department activities, not departments.
(Cafeteria)
Activity
Service
One
The
Department
Product
(Accounting)
Activity
Two
Service
Department
(Personnel)
17-15
Joint Product Cost Allocation
Joint
Product
Separate Final
Costs Oil
Processing Sale
Joint Separate
Joint
Production Processing Costs
Input
Process
Gasoline Separate Final
Processing Sale
Split-Off Separate
Point Processing Costs
17-16
Allocating Joint Costs
Physical-Units
Method
Relative-
Joint Product Sales-Value
Costs Method
Net-Realizable-
Value Method
17-17
Allocating Joint Costs
Allocation based on a
Physical-Units physical measure of the
Method joint products at the
split-off point.
Allocation based on
Relative-Sales- the relative values
Value Method of the products at
the split-off point.
Allocation based on
Net-Realizable- final sales values less
Value Method separable processing
costs.
17-18
Physical-Units Method
Joint conversion
cost = $225,000 Oil 240,000 gallons
Joint
Joint material Production
cost = $275,000 Process
Gasoline 360,000 gallons
Split-Off
Point
17-19
Physical-Units Method
Product
Oil Gasoline Total
Output quantities in gallons 240,000 360,000 600,000
Proportionate share:
240,000 ÷ 600,000 40%
360,000 ÷ 600,000 60%
Allocated joint costs:
$500,000 × 40% $ 200,000
$500,000 × 60% $ 300,000
$225,000 joint conversion cost plus
$275,000 joint material cost
17-20
Relative-Sales-Value Method
Joint conversion $200,000
cost = $225,000 Oil sales value at
split-off point
Joint
Joint material Production
cost = $275,000 Process
$600,000
Gasoline sales value at
split-off point
Split-Off
Point
17-21
Relative-Sales-Value Method
Product
Oil Gasoline Total
Sales value at split-off point $ 200,000 $ 600,000 $ 800,000
Proportionate share:
$200,000 ÷ $800,000 25%
$600,000 ÷ $800,000 75%
Allocated joint costs:
$500,000 × 25% $ 125,000
$500,000 × 75% $ 375,000
$225,000 joint conversion cost plus
$275,000 joint material cost
17-22
Net-Realizable-Value Method
If products require further processing beyond
the split-off point before they are marketable,
it may be necessary to estimate the net
realizable value (NRV) at the split-off point.
Final Added
Estimated
= Sales – Processing
NRV
Value Costs
17-23
Net-Realizable-Value Method
Joint conversion Sales
cost = $225,000 Separate
Oil Value
Processing
$500,000
Joint Separate
Joint material Production Processing Costs
cost = $275,000 Process $200,000
Separate Sales
Gasoline Value
Processing
Split-Off $1,200,000
Point, Sales
Value Unknown Separate
Processing Costs
$500,000
17-24
Net-Realizable-Value Method
Product
Oil Gasoline Total
Sales value $ 500,000 $ 1,200,000 $ 1,700,000
Less additional processing costs 200,000 500,000 700,000
Estimated NRV at split-off point $ 300,000 $ 700,000 $ 1,000,000
Proportionate share:
$300,000 ÷ $1,000,000 30%
$700,000 ÷ $1,000,000 70%
Allocated joint costs:
$500,000 × 30% $ 150,000
$500,000 × 70% $ 350,000
17-25
Reciprocal-Services Method
• Fully accounts for reciprocal services
• More accurate
• Can be combined with dual allocation
17-26