Ch 08 Support Dept Costs

7/29/2019 Ch 08 Support Dept Costs

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Inter-department Cost

Allocations


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The Need for Cost Allocations

OperatingDepartments

Carry out themanufacturing

operations

ServiceDepartments

Provide supportto the

operatingdepartments


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We identify the factorthat drives costs in the

service department.

Thiscost driveris usedas theallocation base.


How are servicedepartment costs

charged to operating

departments?


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First Stage AllocationsService department costs are

allocated to operating departments.ServiceDepartment(Cafeteria)

ServiceDepartment

(Accounting)

ServiceDepartment

(Personnel)

OperatingDepartment(Machining)

OperatingDepartment(Assembly)

TheProducts


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ServiceDepartment(Cafeteria)

ServiceDepartment

(Accounting)

ServiceDepartment

(Personnel)


OperatingDepartment(Assembly)

TheProducts

Second Stage Allocations

Operating department overhead costs andallocated service department costs are

applied to products.


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Interdepartmental Services

Problem

Allocating costs when service departmentsprovide services to each other

Solutions

Direct MethodStep method

Reciprocal method


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Departmental costs and benefit patterns

Service Department Allocation Base

Cafeteria Number of employees

Custodial Square feet occupied

Note that each of the service departmentsreceives reciprocal benefits.


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Departmental costs and benefit patterns

It is sometimes useful to express the benefit patterns of the servicedepartments in percentage terms:

Service departments Operating departments Totals

CAF CUS MACH ASMB

Initial charges $600,000 $480,000 $100,000 $100,000 $1,280,000

CAF benefits (%) -- 30% 20% 50% 100%

CUS benefits (%) 20% -- 60% 20% 100%


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Direct Method


Service

Department(Custodial)


Operating

Department(Assembly)

Interactionsbetween servicedepartments areignored and all

costs areallocated directly

to operating

departments.


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Direct Method Example




The direct method will ignore the services provided byservice Departments to other service departments. Ifso, what proportion Of the custodial departments

costs will be allocated to each production dept.?


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Direct Method Example

Allocation base: Square feet occupied

5,00015,000 + 5,000

$480,000 = $120,000


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Operating


Step Method

Once a servicedepartments costs

are allocated,other service

department costsare not allocated

back to it.


Service


How do we identify the order in which the service departmentcosts are to be allocated? Does it matter if Custodial costs

are allocated first (before the Cafeteria costs)?


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Step Method #1:Cafeteria allocated first.


Service



Operating


Custodial willhave a new

total to allocateto operating

departments; itsown costs plus

those costs

allocated fromthe cafeteria.


CAF CUS MACH ASMB

Initial charges $600,000 $480,000 $100,000 $100,000 $1,280,000

CAF benefits (%) -- 30% 20% 50% 100%

CUS benefits (%) 20% -- 60% 20% 100%


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Step Method #1 Example





CAF CUS MACH ASMB

Initial charges $600,000 $480,000 $100,000 $100,000 $1,280,000

CAF benefits (%) -- 30% 20% 50% 100%

CUS benefits (%) 20% -- 60% 20% 100%


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Step Method#1 Example


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Step Method #2:Custodial allocated first.

ServiceDepartment(Custodial)

Service

Department(Cafeteria)


Operating


Cafeteria willhave a new

total to allocateto operating

departments; itsown costs plus

those costs

allocated fromthe custodialdepartment.


CAF CUS MACH ASMB

Initial charges $600,000 $480,000 $100,000 $100,000 $1,280,000

CAF benefits (%) -- 30% 20% 50% 100%CUS benefits (%) 20% -- 60% 20% 100%


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Step Method #2 Example


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Reciprocal Method

Interdepartmentalservices are given

full recognitionrather than partialrecognition as withthe step method.


Service



Operating


Question: Is the step method always more accurate than the directmethod? In order to answer this question, we must know the

correct answer, I.e., the reciprocal method results.


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Reciprocal Method of Interdepartmental Cost Allocation

First, it is useful to express each service departments benefit

pattern in percentages:


CAF CUS MACH ASMB

Initial charges $600,000 $480,000 $100,000 $100,000 $1,280,000



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1. Define the total costs in each of the service departments

as follows:

Total cost = Initial charges + allocations from other cost pools

Service departments Operating departments TotalsCAF CUS MACH ASMB

Initial charges $600,000 $480,000 $100,000 $100,000 $1,280,000

CAF benefits (%) -- 30% 20% 50% 100%

CUS benefits (%) 20% -- 60% 20% 100%


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as follows:


Cafeteria: CAF = $ 600,000 + (.20) CUS

Custodial: CUS = $ 480,000 + (.30) CAF


CAF CUS MACH ASMB

Initial charges $600,000 $480,000 $100,000 $100,000 $1,280,000

CAF benefits (%) -- 30% 20% 50% 100%

CUS benefits (%) 20% -- 60% 20% 100%


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as follows:




Solution: CAF = $ 740,000 *

CUS = $ 702,000 ** Solution amounts are rounded to the nearest $1,000.


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as follows:




Solution: CAF = $ 740,000 *

CUS = $ 702,000 ** Solution amounts are rounded to the nearest $1,000.

2. Allocate costs to the operating departments based on their

percentage use of the allocation base (see next slide)


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=$740,000


=$702,000

Solution: MACH=$100,000 + (.20)CAF + (.60)CUS)

=$100,000 + $148,000 + $421,000

=$669,000

ASBY=$100,000 + (.50)CAF + (.20)CUS)

=$100,000 + $370,000 + $141,000

=$611,000


CAF CUS MACH ASMB

Initial charges $600,000 $480,000 $100,000 $100,000 $1,280,000



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Comparison of Methods *

Allocationmethod Machining Assembly Total

Direct $ 631,000 $ 649,000 $ 1,280,000

Step #1 $ 715,000 $ 565,000 $ 1,280,000

Step #2 $ 587,000 $ 693,000 $ 1,280,000

Reciprocal $ 669,000 $ 611,000 $ 1,280,000

Note that in this case, the direct method provides costs that arenearest to the correct costs, as determined by the reciprocal

method. This may not always be the case.

* Solution amounts are rounded to the nearest $1,000.


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Allocating Costs by Behavior

VariableCosts

Chargetooperating

departments based onthe usageof theallocation base.

FixedCosts

Allocateto operating departments

in proportion to the

long-term capacityrequired by the

operating department.


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Handout 8 (a):

Interdepartmental Allocations,

Alternative Methods


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The Nestling company has two support departments, Custodial (CU) and Repair (RP). All

support department costs are allocated to production departments A and B. The service

department work done in the most recent period was distributed as follows (in percentages):

Services used by:

CU RP A B Total

Services supplied by:

CU -- 40% 15% 45% 100%

RP 20% -- 60% 20% 100%

The total variable costs incurred in the two support departments were as follows:

$ 315,000 in Department CU and $ 150,000 in Department RP.

Required:

(a) Determine the total dollar amounts of support department costs that would be allocated

to each of the producing departments using the direct method.

Allocation to A: $________________________

Allocation to B: $________________________

Services used by:


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Required:

(a) Determine the total dollar amounts of support department costs that would be allocated to

each of the producing departments using the direct method.

Services used by:

CU RP A B Total

Initial charges $315,000 $150,000 -- -- $465,000


CU ($315,000) $78,750 $236,250

RP ($150,000) $112,500 $37,500

Total charges -- -- $191,250 $273,750 $465,000

Allocation to A: $_________191,250_______

Allocation to B: $_________273,750_________

CU RP A B Total


CU -- 40% 15% 45% 100%

RP 20% -- 60% 20% 100%

Services used by:


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(b) Determine the dollar amounts of support department costs that would be allocated each

department A using the step method, using the ordering of the departments shown above

(i.e., CU first, and RP second).

CU RP A B Total


CU -- 40% 15% 45% 100%

RP 20% -- 60% 20% 100%

Services used by:


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(b) Determine the dollar amounts of support department costs that would be allocated

each department A using the step method, using the ordering of the departments

shown above (i.e., CU first, and RP second).

CU RP A B Total


CU -- 40% 15% 45% 100%

RP 20% -- 60% 20% 100%

Services used by:

CU RP A B Total

Initial charges $315,000 $150,000 -- -- $465,000


CU ($315,000) $126,000 $47,250 $141,750

RP ($276,000) $207,000 $69,000

Total charges -- -- $254,250 $210,750 $465,000

(c) Determine the dollar amounts of support department costs that would be


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( ) pp p

allocated to each of the producing departments using the reciprocal method.

First, set up the simultaneous equations and solve for the total costs in the service

departments:Services used by:

CU RP A B Total


CU -- 40% 15% 45% 100%

RP 20% -- 60% 20% 100%



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( ) pp p



departments:

CU = $315,000 + (.2) RP

RP = $150,000 + (,4) CU

Services used by:

CU RP A B Total


CU -- 40% 15% 45% 100%

RP 20% -- 60% 20% 100%



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( ) pp p



departments:

CU = $315,000 + (.2) RP

RP = $150,000 + (,4) CU

Services used by:

CU RP A B Total


CU -- 40% 15% 45% 100%

RP 20% -- 60% 20% 100%

Solution: CU = $375,000

RP = $300,000

Allocation to A: A = (.15) ($375,000) + (.60) ($300,000)

= $236,250

Allocation to B: B = (.45) ($375,000) + (.20) ($300,000)

= $228,750

Ch 08 Support Dept Costs

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