support department cost allocation management accounting: the cornerstone for business decisions...
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Support Department Cost
Allocation
Management Accounting: The Cornerstone for
Business Decisions
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
Learning Objectives
1. Describe the difference between support departments and producing departments.
2. Calculate single and multiple charging rates for a support department.
3. Assign support department costs to producing departments using the direct, sequential, and reciprocal methods.
4. Calculate departmental overhead rates.
Match Definitions
Producing Dept.
Support Dept.
Cost drivers that measure use or consumption of support services
Costs that are directly traceable to a specific department
Direct Costs
Causal Factors
Provides essential support services to producing departmts.
Responsible for directly creating a product or service sold to a customer
What are the steps for determining product costs
using predetermined overhead rates?1. Departmentalize the firm
2. Classify each department as support or producing
3. Trace all costs in the firm to a support or producing department
4. Assign support department costs to producing departments using cost drivers that measure consumption of support department services
5. Calculate predetermined overhead rates for producing departments
6. Assign overhead costs to the units of individual products using the predetermined overhead rates
What are the objectives of assigning support department costs?
1. To obtain a mutually agreeable price
2. To compute product line profitability
3. To predict the economic effects of planning and control
4. To value inventory5. To motivate managers.
How to calculate and use a single charging
rate.Budgeted cost of Kuma & Buttons copying
department:Fixed costs : $20,000 per year (machine rental &
maintenance)Variable costs: $0.05 per page copied (paper and
toner)Budgeted usage: Actual usage:
Pages PagesAudit 120,000 128,000Compliance 90,000 82,000Fraud 90,000 95,000 Total 300,000 307,000
14-1
REQUIRED: Calculate a single charging rate and use this rate to assign the costs of the copying department to the user departments based on both budgeted and actual usage. Discuss the service usage performance of the producing departments.
Calculation: Single charging rate:
Total budgeted cost of the copying department:Fixed costs: $20,000Variable costs (300,000 x $0.05) 15,000
Total $35,000Budgeted single rate = $35,000 / 300,000 =
0.1167 per page
How to calculate and use a single charging
rate.14-1
Assignment based on budgeted usage (budgeted service cost-needed as a performance benchmark and for product costing):
The budgeted amount charged to the producing departments is calculated as follows:
Number of Charge Total
Pages per Pages Charges
Audit 120,000 $0.1167 $14,004
Compliance 90,000 0.1167 10,503
Fraud 90,000 0.1167 10,503
Total 300,000 $35,010
How to calculate and use a single charging
rate.14-1
Assignment based on actual usage (actual service costs – to be compared with the budgeted service costs).
The actual amount charged to the producing department is calculated as follows:
Number of Charge Total
Pages per Pages Charges
Audit 128,000 $0.1167 $14,938
Compliance 92,000 0.1167 10,736
Fraud 95,000 0.1167 10,736
Total 305,000 $36,410
How to calculate and use a single charging
rate.14-1
Illustrate Allocation Relationships
How to calculate and assign service costs using multiple
charging rates.Budgeted cost of Kuma & Buttons copying
department:Fixed costs : $20,000 per year (machine rental &
maintenance)Variable costs: $0.05 per page copied (paper and
toner)Estimated Budgeted: Actual:
Peak Usage Usage Usage(Monthly)
Pages: Pages: Pages:Audit 9,200 120,000 128,000Compliance 25,000 90,000 82,000Fraud 7,800 90,000 95,000 Total 42,000 300,000 307,000
14-2
REQUIRED: Assign copying cost to the producing departments using variable and fixed rates based on both budgeted and actual usage
Calculation: Fixed cost assignment (assigned in proportion to peak usage for both budgeted and actual usage cases):
Peak #Proportion ofTotal FixedAmount Assigned
of pages Peak Usage Costs to Each Dept.
Audit 9,200 0.219 $15,000 $3,285Compliance25,000 0.595 15,000 8,925Fraud 7,800 0.186 15,000 2,790 Total 42,000 $15,000Total cost assignment = Variable + Fixed
How to calculate and assign service costs using multiple
charging rates.14-2
Budgeted usage (Budgeted costs for performance benchmark and product costing):
Number of Number of Fixed Cost Total
PagesPages X $0.04Assignment Charges
Audit 120,000 $4,800 $3,285 $8,085Compliance 90,000 3,600 8,925 12,525Fraud 90,000 3,600 2,790 6,390 Total 300,000 $12,000 $15,000 $27,000
How to calculate and assign service costs using multiple
charging rates.14-2
Actual usage (Actual costs for comparison with planned performance):
Number of Number of Fixed Cost Total
PagesPages X $0.04Assignment Charges
Audit 128,000 $5,120 $3,285 $8,405Compliance 82,000 3,280 8,925 12,205Fraud 95,000 3,800 2,790 6,590 Total 307,000 $12,200 $15,000 $27,200
How to calculate and assign service costs using multiple
charging rates.14-2
Define Direct Method of Cost Allocation
How to assign support department costs using the
direct method.Support Depts. Producing Depts
Power Maint. Grinding AssemblyDirect Costs
Variable $180,000$150,000$75,000 $20,000Fixed 120,000 80,000 25,000 40,000
Expected ActivityKilowatt hrs. 0200,000 700,000 300,000Mainten. hrs. 1,000 0 4,500 4,500
Percent of Peakcapacity requiredMaintenance 75% 25%Power 65% 35%
14-3
REQUIRED: Using the direct method, assign the support department costs to the producing departments using a single-rate approach and a dual-rate approach. For the dual-rate approach use peak capacity to assign fixed costs.
Calculation: Grinding Assembly
Power: 700,000 / (700,000 + 300,000) 70%
300,000 / (700,000 + 300,000) 30%
Maint.: 4,500 / (4,500 + 4,500) 50%
4,500 / (4,500 + 4,500) 50%
How to assign support department costs using the
direct method.14-3
How to assign support department costs using the
direct method.Using a single rate approach:
14-3
Support Dept. Producing Dept.
Power Mainten. Grinding Assembly
Direct costs $300,000 $230,000 $ 75,000 $ 20,000
Power (300,000) 210,000 90,000
Maintenance - (230,000) 115,000 115,000
Total $ - $ - $400,000 $225,000
How to assign support department costs using the
direct method.Using a dual-rate approach
14-3
Support Dept. Producing Dept.
Power Mainten. Grinding Assembly
Direct costs $ 300,000 $230,000 $ 75,000 $ 20,000
Var. cost. assign.
Power (180,000) - 126,000 54,000
Maintenance - (150,000) 75,000 75,000
Fix. cost. assign.
Power (120,000) - 90,000 30,000
Maintenance - (80,000) 52,000 28,000
Total $ - $ - $418,000 $207,000
How to assign support department costs using the
sequential method.Support Depts. Producing Depts
Power Maint. Grinding AssemblyDirect Costs
Variable $180,000$150,000$75,000 $20,000Fixed 120,000 80,000 25,000 40,000
Expected ActivityKilowatt hrs. 0200,000 700,000 300,000Mainten. hrs. 1,000 0 4,500 4,500
Percent of Peakcapacity requiredMaintenance 75% 25%Power 20% 50% 30%
14-4
REQUIRED: Using the sequential method, assign the support department costs to the producing departments using a single-rate approach and a dual-rate approach. For the dual-rate approach use peak capacity to assign fixed costs.
Calculation: Maint.Grinding Assembly
Power:
200,000 / (200,000 + 700,000 + 300,000) 16.67%
700,000 / (200,000 + 700,000 + 300,000) 58.33%
300,000 / (200,000 + 700,000 + 300,000)25.00%
Maint.: 4,500 / (4,500 + 4,500) 50%
4,500 / (4,500 + 4,500) 50%
How to assign support department costs using the
sequential method.14-4
How to assign support department costs using the
sequential method.Using a single rate approach:
14-4
Support Dept. Producing Dept.
Power Mainten. Grinding Assembly
Direct costs $ 300,000 $230,000 $ 75,000 $ 20,000
Power (300,000) 50,010 174,990 75,000
Maintenance - (280,010) 140,005 140,005
Total $ - $ - $389,995 $235,005
How to assign support department costs using the
sequential method.Using a dual-rate approach
14-4
Power Mainten. Grinding Assembly
Direct costs $300,000 $230,000 $ 75,000 $ 20,000
Var. cost. assign.
Power (180,000) 30,006 104,994 45,000
Maintenance - (180,006) 90,003 90,003
Fix. cost. assign.
Power (120,000) 24,000 60,000 36,000
Maintenance - (104,000) 67,600 36,400
Total $ - $ - $397,597 $227,403
How to calculate and use departmental overhead rates.
Summary of the single rate sequential cost assignment
Producing DepartmentsGrinding Assembly
Direct costs $100,000 60,000Power cost assign. 174,990 75,000Maint. Cost assign. 140,005 140,005
$414,995 275,005Machine hrs. (expected level) 71,000Assembly hrs. (expected level) 107,500One unit of Product Alpha uses 2 machine hours in
the Grinding Department and 3 hours in the Assembly Department
14-4
REQUIRED: Calculate the departmental overhead rates using machine hours for grinding and assembly hours for assembly. Using the rates, determine the overhead costs assigned to one unit of product A.
Calculation:Overhead rate (Grinding) = $414,995 / 71,000 =
$5.845 per MHOverhead rate (Assembly) = $275,005 / 107,500 =
$2.558 per Assembly hourProduct A unit overhead cost = ($5.845 x 2) +
($2.558 x 3) = $19.364
How to calculate and use departmental overhead rates.
14-4
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