PowerPoint Presentation by
Gail B. Wright
Professor Emeritus of Accounting
Bryant University
Copyright 2007 Thomson South-Western, a part of The
Thomson Corporation. Thomson, the Star Logo, and
South-Western are trademarks used herein under license.
MANAGEMENT
ACCOUNTING
8th EDITION
BY
HANSEN & MOWEN
7 SUPPORT-DEPARTMENT COST
ALLOCATION
LEARNING
OBJECTIVES
LEARNING
OBJECTIVES
LEARNING GOALS
After studying this
chapter, you should
be able to:
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
1. Describe the difference between support
departments and producing departments.
2. Calculate single & multiple charging rates
for a support department.
3. Allocate support-department costs to
producing departments using the direct,
sequential, & reciprocal methods.
Continued
3
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
4. Compute departmental overhead rates.
5. Describe the allocation of joint costs to
products. (Appendix).
Click the button to skip
Questions to Think About
QUESTIONS TO THINK ABOUT:
Hamilton & Barry, CPAs
Why do you think that the
photocopying charges amount to
$0.12 per page? List types of costs
incurred & divide them into fixed
& variable categories.
QUESTIONS TO THINK ABOUT:
Hamilton & Barry, CPAs
Jan mentioned the security &
convenience of in-house
photocopying. How to you think
the firm might weigh these factors
in deciding whether cost of inhouse copying is worth it?
6
QUESTIONS TO THINK ABOUT:
Hamilton & Barry, CPAs
Since the firm as a whole has
decided to have an in-house
copying department, why are
copying costs charged to the
individual departments? What
purpose does developing supportdepartment charging rates serve?
7
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
Describe the difference
between support
departments and producing
departments.
LO 1
ALLOCATION:
ALLOCATION: Definition
Definition
A means of dividing a pool of
costs & assigning it to various
subunits.
LO 1
COST ALLOCATION
While
While cost
cost allocation
allocation does
does not
not affect
affect
total
total product
product cost,
cost, itit will
will affect
affect
pricing
pricing &
& profitability
profitability of
of individual
individual
products
products depending
depending on
on method
method
used.
used.
10
LO 1
COMMON
COMMON COSTS:
COSTS: Definition
Definition
Mutually beneficial costs which
occur when the same resource is
used in output of 2 or more
services or products.
11
LO 1
TYPES OF DEPARTMENTS
Producing
Producing departments
departments are
are directly
directly
responsible
responsible for
for creating
creating products,
products,
services
services sold.
sold. Support
Support departments
departments
provide
provide essential
essential support
support services
services
for
for producing
producing departments.
departments.
12
LO 1
How are overhead costs treated
for producing & support
departments?
Once producing & support
departments are identified,
overhead costs are traced, not
allocated to each department.
13
LO 1
Why cant a support
department have an overhead
rate to assign to products?
Support departments do not
produce salable products.
14
LO 1
CAUSAL
CAUSAL FACTORS:
FACTORS: Definition
Definition
Activities within a producing
department that provoke the
incurrence of support service
costs.
15
LO 1
TYPES OF DEPARTMENTS:
Examples
Manufacturing plant
Producing departments (Assembly & Finishing)
Support departments (Storeroom, Cafeteria,
Maintenance, General Factory)
Bank
Producing (Auto Loans, Commercial Lending,
Personal Banking
Support departments (Drive-Thru, Data
Processing, Bank Administration)
16
LO 1
How are costs allocated from
departments to products?
First, support department costs
are assigned to producing
departments. Then overhead
rates are developed to cost
products.
17
LO 1
OBJECTIVES OF
ALLOCATION
To obtain a mutually agreeable price
To compute product-line profitability
To predict the economic effects of planning &
control
To value inventory
To motivate managers
18
LO 1
COMPETITIVE PRICING
Requires understanding costs
Overstating leads to loss of business
Understating produces losses
Leads to evaluating product or service mix
Dropping some services
Reallocating resources
Repricing
19
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
Calculate single &
multiple charging rates
for a support
department.
20
LO 2
What kinds of charging rates
are used?
Companies use either a single
charging rate or multiple
charging rates.
21
LO 7
PHOTOCOPYING
PHOTOCOPYING DEPT.:
DEPT.:
Barry
Barry &
& Hamilton
Hamilton
Service department usage
Audit department
94,500
Tax department
67,500
MAS department
Total
108,000
270,000
Costs
Fixed
Estimated variable
$ 26,190
6,210
22
LO 2
FORMULAS: Single Charging Rate
Charging rate =
Total estimated costs / Estimated usage
$ 32,400 / 270,000 = $0.12 per page
Allocating charges:
# Pages x Charging rate = Allocated charges
23
LO 2
CHARGE
CHARGE ALLOCATION:
ALLOCATION: Single
Single
Charging
Charging Rate
Rate
Dept
# Pages
Charge
Rate
Audit
92,000
$ 0.12
$ 11,040
Tax
65,000
0.12
7,800
115,000
0.12
13,800
MAS
Total
272,000
Total
Charges
$ 32,640
24
LO 2
What do you need to know to
use multiple charging rates?
Multiple charging rates require
that causal factors are known.
25
LO 2
PHOTOCOPYING DEPT: Causal
Factors
Causal
Causal factor
factor for
for size
size &
& costs
costs of
of
photocopying
photocopying is
is monthly
monthly peak
peak
usage.
usage.
26
LO 2
FORMULAS: Multiple Charging Rates
Peak usage =
Average usage Audit + MAS
16875
Peak usage, Tax
22,500
Peak usage
39,375
Allocating charges:
Fixed costs = Proportion Peak x Fixed Cost
Variable costs = Estimated Variable cost x
Actual page usage
27
LO 2
FIXED
FIXED COST
COST ALLOCATION
ALLOCATION
Dept
Peak
# Pages
Audit
7,875
0.20
$ 26,190
$ 5,238
22,500
0.57
26,190
14,928
9,000
0.23
26,190
6,024
Tax
MAS
Total
39,375
Proportion Total Fixed
Cost
Peak Usage
Total
Charges
$ 26,190
28
LO 2
COST
COST ALLOCATION:
ALLOCATION: Multiple
Multiple
Charging
Charging Rates
Rates
Dept
Total
# Pages
Variable Cost
@ $0.023
Audit
92,000
$ 2,116
Tax
65,000
MAS
Total
Fixed Cost
Allocation
$
Total
Charges
5,238
$ 7,354
1,495
14,928
16,423
115,000
2,645
6,024
8,669
272,000
$ 6256
$ 26,190
$ 32,446
29
LO 2
What are the uses of budgeted
costs?
Budgeted costs are used 1) to
help determine overhead rate
and 2) for service department
performance evaluation .
30
LO 2
PERFORMANCE
EVALUATION
General principle
Managers should not be held responsible for cost
or activities over which they have no control
Corollary
Actual costs should not be allocated to producing
departments because they include either
efficiencies or inefficiencies of supporting
departments
31
LO 2
When should actual &
budgeted costs be used?
Actual costs should be used for
performance evaluation.
Budgeted costs should be used
for product costing.
32
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
Allocate supportdepartment costs to
producing departments
using the direct,
sequential, & reciprocal
methods.
33
LO3
MULTIPLE SUPPORT
DEPARTMENTS
When
When aa company
company has
has multiple
multiple
support
support departments
departments that
that interact,
interact,
managers
managers must
must choose
choose an
an
allocation
allocation method.
method.
34
LO 3
ALLOCATION METHODS:
Multiple Service Departments
Direct allocation method
Allocate support department costs only to
producing departments
Sequential allocation method
Allocate support department costs in step-down
approach
Reciprocal allocation method
35
LO3
MULTIPLE SUPPORT
DEPARTMENTS: Background
A factory has the following departments
Producing
Grinding
Assembly
Support
Power
Maintenance
36
LO 3
MULTIPLE SUPPORT
DEPARTMENTS: Data
EXHIBIT 7.7
37
LO 3
EXHIBIT 7.6
ALLOCATION: Direct Method
38
LO 3
ALLOCATION: Direct Method Step 1
Develop allocation
ratios for support
department costs.
EXHIBIT 7.8
39
LO 3
ALLOCATION: Direct Method Step 2
Prorate support
department costs to
producing depts.
EXHIBIT 7.8
40
EXHIBIT 7.9
ALLOCATION: Sequential Method
LO 3
41
LO 3
ALLOCATION: Sequential Method
Step 1
Develop allocation
ratios for support
depts. costs according
to ranking.
EXHIBIT 7.10
42
LO 3
ALLOCATION: Sequential Method
Step 2
Allocate support depts.
costs to other
departments in order of
rankings.
EXHIBIT 7.10
43
LO 3
FORMULAS: Multiple Charging Rates
Allocate each supporting departments costs to
all other departments before allocating
supporting departments costs to producing
departments.
Allocating Power & Maintenance charges:
P = Direct costs + Share of M. costs
M = Direct costs + Share of P. costs
44
LO 3
ALLOCATION: Reciprocal Method
Step 1
Develop allocation
ratios for support
departments costs.
EXHIBIT 7.11
45
LO 3
ALLOCATION: Reciprocal Method
Step 2
Allocate support depts.
costs to producing
departments.
EXHIBIT 7.12
46
LO 3
COMPARING ALLOCATION
METHODS
Accountants choose
between better allocation
& cost benefit of easier
method.
EXHIBIT 7.13
47
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
Compute departmental
overhead rates.
48
LO 4
COSTING PROCESS
Has following steps
Identify supporting and producing
departments
Allocate supporting department costs to
producing departments
Allocate overhead to producing departments
at predetermined rates
49
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
Describe the allocation
of joint costs to
products. (Appendix).
50
LO 5
JOINT
JOINT PRODUCTS:
PRODUCTS: Definition
Definition
A single process produces 2 or
more products up to a split-off
point.
51
LO 5
SPLIT-OFF
SPLIT-OFF POINT:
POINT: Definition
Definition
The point at which products
become separate &
identifiable.
52
LO 5
ACCOUNTING FOR JOINT
PRODUCT COSTS
3 methods
Physical units: joint costs distributed on basis of
physical units
Sales-value-at-split-off: joint costs distributed on
basis of sales value at split-off
Net realizable value: joint costs distributed on
basis of hypothetical sales value
By-products: because insignificant sales value,
no joint cost allocation
53
CHAPTER 7
THE
THE END
END
54
