Leach & Melicher - Ch 07 Types and Costs of Financial Capital - Ef
Ch 08 Support Dept Costs
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Transcript of 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.
The Need for Cost Allocations
How are servicedepartment costs
charged to operating
departments?
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The Need for Cost Allocations
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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The Need for Cost Allocations
ServiceDepartment(Cafeteria)
ServiceDepartment
(Accounting)
ServiceDepartment
(Personnel)
OperatingDepartment(Machining)
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
ServiceDepartment(Cafeteria)
Service
Department(Custodial)
OperatingDepartment(Machining)
Operating
Department(Assembly)
Interactionsbetween servicedepartments areignored and all
costs areallocated directly
to operating
departments.
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Direct Method Example
Service Department Allocation Base
Cafeteria Number of employees
Custodial Square feet occupied
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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OperatingDepartment(Machining)
Operating
Department(Assembly)
Step Method
Once a servicedepartments costs
are allocated,other service
department costsare not allocated
back to it.
ServiceDepartment(Cafeteria)
Service
Department(Custodial)
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.
ServiceDepartment(Cafeteria)
Service
Department(Custodial)
OperatingDepartment(Machining)
Operating
Department(Assembly)
Custodial willhave a new
total to allocateto operating
departments; itsown costs plus
those costs
allocated fromthe cafeteria.
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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Step Method #1 Example
Service Department Allocation Base
Cafeteria Number of employees
Custodial Square feet occupied
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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Step Method#1 Example
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Step Method #2:Custodial allocated first.
ServiceDepartment(Custodial)
Service
Department(Cafeteria)
OperatingDepartment(Machining)
Operating
Department(Assembly)
Cafeteria willhave a new
total to allocateto operating
departments; itsown costs plus
those costs
allocated fromthe custodialdepartment.
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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Step Method #2 Example
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Reciprocal Method
Interdepartmentalservices are given
full recognitionrather than partialrecognition as withthe step method.
ServiceDepartment(Cafeteria)
Service
Department(Custodial)
OperatingDepartment(Machining)
Operating
Department(Assembly)
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:
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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Reciprocal Method of Interdepartmental Cost Allocation
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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Reciprocal Method of Interdepartmental Cost Allocation
1. Define the total costs in each of the service departments
as follows:
Total cost = Initial charges + allocations from other cost pools
Cafeteria: CAF = $ 600,000 + (.20) CUS
Custodial: CUS = $ 480,000 + (.30) CAF
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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Reciprocal Method of Interdepartmental Cost Allocation
1. Define the total costs in each of the service departments
as follows:
Total cost = Initial charges + allocations from other cost pools
Cafeteria: CAF = $ 600,000 + (.20) CUS
Custodial: CUS = $ 480,000 + (.30) CAF
Solution: CAF = $ 740,000 *
CUS = $ 702,000 ** Solution amounts are rounded to the nearest $1,000.
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Reciprocal Method of Interdepartmental Cost Allocation
1. Define the total costs in each of the service departments
as follows:
Total cost = Initial charges + allocations from other cost pools
Cafeteria: CAF = $ 600,000 + (.20) CUS
Custodial: CUS = $ 480,000 + (.30) CAF
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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Reciprocal Method of Interdepartmental Cost Allocation
Cafeteria: CAF = $ 600,000 + (.20) CUS
=$740,000
Custodial: CUS = $ 480,000 + (.30) CAF
=$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
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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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
Services supplied by:
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
Services supplied by:
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
Services supplied by:
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
Services supplied by:
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
Services supplied by:
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
Services supplied by:
CU -- 40% 15% 45% 100%
RP 20% -- 60% 20% 100%
(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:
CU = $315,000 + (.2) RP
RP = $150,000 + (,4) CU
Services used by:
CU RP A B Total
Services supplied by:
CU -- 40% 15% 45% 100%
RP 20% -- 60% 20% 100%
(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:
CU = $315,000 + (.2) RP
RP = $150,000 + (,4) CU
Services used by:
CU RP A B Total
Services supplied by:
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