service and production departmentcost allocation

8/9/2019 Service and Production DepartmentCost Allocation

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ServiceDepartment(Cafeteria)

ServiceDepartment(Accounting)

ServiceDepartment(Personnel)

Production

Department(Machining)

Production

Department(Assembly)

TheProduct

Directand

IndirectCosts

Service and Production DepartmentCost Allocation


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ServiceDepartment

(Cafeteria)Service

Department(Accounting)


Production


Production


TheProduct

Directand

IndirectCosts


First Phase:Trace direct costsand allocate indirect costs to all departments


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Production


Production


TheProduct

Directand

IndirectCosts


Second Phase: Allocateservice department costs

to production departments.


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Production


Production


TheProduct

Directand

IndirectCosts


Third Phase: Allocate production department overhead

costs to products.


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Methods of Allocating ServiceDepartment Costs

Problem

Allocating costs when service departments

provide services to each other

Solutions

Direct methodStep method

eciprocal method


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Direct Method


Service

Department(Custodial)

ProductionDepartment(Machining)

Production


Cost of servicesbeteen servicedepartments areignored and all

costs areallocated directly

to user

departments!


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Direct Method !"ample

Service Department Allocation #ase

Cafeteria $umber of emplo%ees

Custodial S&uare feet occupied

Service Departments Production Departments

Cafeteria Custodial Machining Assembl%

Departmental costs before allocation '()*)))+ ,)*)))+ -))*)))+ .))*)))+

$umber of emplo%ees /0 /) 1) ')

S&uare feet occupied 0*))) 1*))) 10*))) 0)*)))


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Direct Method



Departmental costs

before allocation '()*)))+ ,)*)))+ -))*)))+ .))*)))+

Cafeteria allocation 2 2 2 2

Custodial allocation 2 2 2 2

Total after allocation 2 2 2 2


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Direct Method



Departmental costs


Cafeteria allocation 3'()*)))4 ) /--*))) 2



+'()*))) 5 1)1) 6 ')

7 +/--*)))

Allocation base: $umber of emplo%ees


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Direct Method



Departmental costs


Cafeteria allocation 3'()*)))4 ) /--*))) 1/(*)))



+'()*))) 5 ')1) 6 ')

7 +1/(*)))



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Departmental costs



Custodial allocation ) 3,)*)))4 ')*))) 2

Total after allocation + ) + ) 0.-*)))+ 2

Direct Method

+,)*))) 5 10*)))10*))) 6 0)*)))

7 +')*)))

Allocation base: S&uare feet occupied


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Departmental costs



Custodial allocation ) 3,)*)))4 ')*))) ()*)))

Total after allocation + ) + ) 0.-*)))+ ,.(*)))+

Direct Method

0)*)))10*))) 6 0)*)))

7 +()*)))+,)*))) 5



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Step Method

Service departmentcosts are allocated

to other servicedepartments and

to productiondepartments" usually

starting ith theservice department

that provides thegreatest amount of

service to otherdepartments!


Service



Production



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Step Method


Service



Production


#nce a servicedepartment$s costs

are allocated"other service

department costsare not allocated

bac% to it!


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Step Method

Custodial illhave a ne

total to allocateto production

departments& itson costs plus

those costs

allocated fromthe cafeteria!


Service



Production



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Step Method !"ample




8e will use the same data used in the direct method e"ample.







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Step Method



Departmental costs






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Step Method



Departmental costs


Cafeteria allocation 3'()*)))4 ()*))) 2 2



+'()*))) 5/)

/) 6 1) 6 ')7 +()*)))



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Step Method



Departmental costs


Cafeteria allocation 3'()*)))4 ()*))) /1)*))) 2



+'()*))) 5 1)/) 6 1) 6 ')

7 +/1)*)))



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Step Method



Departmental costs


Cafeteria allocation 3'()*)))4 ()*))) /1)*))) /9)*)))



+'()*))) 5 ')/) 6 1) 6 ')

7 +/9)*)))



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Step Method



Departmental costs



Custodial allocation 2 3/0)*)))4 2 2

Total after allocation 2 + ) 2 2

$ew total 7 +,)*))) original custodial costplus +()*))) allocated from the cafeteria.


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Step Method



Departmental costs



Custodial allocation ) 3/0)*)))4 0)*))) 2

Total after allocation + ) + ) 0.)*)))+ 2

10*)))10*))) 6 0)*)))

7 +0)*)))+/0)*))) 5



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Step Method



Departmental costs



Custodial allocation ) 3/0)*)))4 0)*))) /))*)))

Total after allocation + ) + ) 0.)*)))+ ,9)*)))+

7 +/))*)))+/0)*))) 5


0)*)))10*))) 6 0)*)))


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eciprocal Method

Interdepartmentalservices are given

full recognitionrather than partialrecognition as iththe step method!


Service



Production



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eciprocal Method !"ample









8e will use the same data used in the previous e"amples.


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eciprocal Method

The total cost of each service department is e&ual to:

Direct costs of that department

6 Costs allocated to that department

The Cafeteria Department receives:

0*)))

0*))) 6 10*))) 6 0)*)))7 of Custodial costs.

//(

The Custodial Department receives:

/)

/) 6 1) 6 ')7 of Cafeteria costs.

/(


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eciprocal Method

Cu ' Total costs of Custodial Department

Ca ' Total costs of Cafeteria Department

n e&uation form:

Cu 7 +,)*))) 6 Ca

and

Ca 7 +'()*))) 6

Cu

/(

//(


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eciprocal Method

n e&uation form:

Cu 7 +,)*))) 6 Ca

and

Ca 7 +'()*))) 6 Cu

/(

//(

Two e&uations and two un;nowns are solved b% substitution:

Ca 7 +'()*))) 6 3+,)*))) 6 Ca4

Ca 7 +'(,*-- 3rounded4

and

Cu 7 +,)*))) 6 3+'(,*--4 7 +/0/*0,

/

/(

/

(

/(


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Departmental costs





eciprocal Method


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Departmental costs


Cafeteria allocation 3'(,*-.-4 (/*0., 2 2



+'(,*-- 5 /)/) 6 1) 6 ')

7 +(/*0,


eciprocal Method


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Departmental costs


Cafeteria allocation 3'(,*-.-4 (/*0., /1'*/09 2



+'(,*-- 5 1)/) 6 1) 6 ')

7 +/1'*/09


eciprocal Method


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Departmental costs


Cafeteria allocation 3'(,*-.-4 (/*0., /1'*/09 /9-*.'.



+'(,*-- 5 ')/) 6 1) 6 ')

7 +/9-*'


eciprocal Method


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Departmental costs



Custodial allocation ,*-.- 3/0/*0.,4 2 2

Total after allocation + ) + ) 2 2

eciprocal Method

0*)))0*))) 6 10*))) 6 0)*)))

7 +,*-- 3rounded4+/0/*0, 5



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Departmental costs



Custodial allocation ,*-.- 3/0/*0.,4 -.*'(9 2

Total after allocation + ) + ) 0.)*01(+ 2

eciprocal Method

10*)))0*))) 6 10*))) 6 0)*)))

7 +-*'(9 3rounded4+/0/*0, 5



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Departmental costs



Custodial allocation ,*-.- 3/0/*0.,4 -.*'(9 ,-*.'.

Total after allocation + ) + ) 0.)*01(+ ,.,*-.-+

eciprocal Method

0)*)))0*))) 6 10*))) 6 0)*)))

7 +,-*' 3rounded4+/0/*0, 5



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Comparison of Methods

Totals after allocation

Machining Assembl%

Method Department Department

Direct 0.-*)))+ ,.(*)))+

Step 0.)*))) ,9)*)))

eciprocal 0.)*01( ,.,*-.-


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Comparison of Methods

The reciprocal method is superior because&

It considers all services provided to otherservice departments!

The total cost of operating a service departmentis computed!

The reciprocal methodreuires the use of matri*algebra ith three or moreservice departments!


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+ointInput

CommonProductionProcess

,inalSale

,inal

Sale

Split-#ffPoint

+ointCosts #il

.asoline

Additional

Processing

SeparateProcessing Costs

AdditionalProcessing

SeparateProcessing Costs


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Sales valueat split=off

able?alue


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+ointInput


Split-#ffPoint

+ointCosts #il

.asoline

Ph%sical Measure Method

/01"111 gallons

231"111 gallons


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Split-#ffPoint

#il

.asoline

/01"111 gallons

231"111 gallons

+oint material

cost ' 4/56"111

+oint conversioncost ' 4//6"111



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Product

@il asoline Total

@utput &uantities in gallons 1-)*))) '()*))) ())*)))

Proportionate share:

2

2

Allocated Boint costs:

2

2



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Product

@il asoline Total



1-)*))) ())*))) -)

'()*))) ())*))) ()


2

2



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Product

@il asoline Total



1-)*))) ())*))) -)

'()*))) ())*))) ()


+0))*))) 5 -) 1))*)))+

+0))*))) 5 () '))*)))+



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+ointInput


Split-#ffPoint

+ointCosts #il

.asoline

Sales ?alue at Split=@ff Method


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+oint material

cost ' 4/56"111


Split-#ffPoint

+oint conversioncost ' 4//6"111 #il

.asoline

4/11"111sales value atsplit-off point

4311"111

sales value atsplit-off point



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Product

@il asoline Total

Sales value at split=off point 1))*)))+ ())*)))+ 9))*)))+


2

2


2

2



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Product

@il asoline Total



+1))*))) +9))*))) 10

+())*))) +9))*))) 0


2

2



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Product

@il asoline Total



+1))*))) +9))*))) 10

+())*))) +9))*))) 0


+0))*))) 5 10 /10*)))+

+0))*))) 5 0 '0*)))+

4/56"111 7oint conversion cost plus4//6"111 7oint material cost


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$et eali>able ?alue Method

f products re&uire further processingbe%ond the split=off point before the%are mar;etable* it ma% be necessar% to

estimatethe net reali>able value at thesplit=off point.

8stimated9:;

,inalSales;alue

AddedProcessing

Costs'


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+ointInput


,inalSale

,inal

SaleSplit-#ff

Point

+ointCosts #il

.asoline

Additional

Processing

AdditionalProcessing Costs

AdditionalProcessing

AdditionalProcessing Costs



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Sales;alue

4611"111

Split-#ffPoint" Sales

;alue


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Product

@il asoline Total

Sales value 0))*)))+ /*1))*)))+ /*.))*)))+

Eess additional processing costs 2 2 2

!stimated $? at split=off point 2 2 2Proportionate share:

2

2


2

2



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Product

@il asoline Total

Sales value 0))*)))+ /*1))*)))+ /*.))*)))+

Eess additional processing costs 1))*))) 0))*))) .))*)))

!stimated $? at split=off point '))*)))+ .))*)))+ /*)))*)))+Proportionate share:

2

2


2

2



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Product

@il asoline Total

Sales value 0))*)))+ /*1))*)))+ /*.))*)))+



+'))*))) +/*)))*))) ')

+.))*))) +/*)))*))) .)


2

2



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Product

@il asoline Total

Sales value 0))*)))+ /*1))*)))+ /*.))*)))+



+'))*))) +/*)))*))) ')

+.))*))) +/*)))*))) .)


+0))*))) 5 ') /0)*)))+

+0))*))) 5 .) '0)*)))+



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#%=Product Costing

=! Asset :ecognition Methods&

a! 9et :eali>able ;alue Method

b! #ther Income at Production Point Method

/! :evenue Methods&

a! #ther Income at Selling Point Method

b! Manufacturing Cost :eduction at Selling

Point Method

service and production departmentcost allocation

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