CH15+Departmental+Costing+Oncourse 3

8/13/2019 CH15+Departmental+Costing+Oncourse 3

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Cost Allocation:Service Department Costs


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Bloomington Stone Company producing

Bybee Stone Company

Closer tohome.

Pentagon

Iowa State

Capital Building


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Departmentalization Bybee Stone:


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Bybee StoneAllocation Methods - Illustration


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Direct method Costs are allocated only to producing departments

Step (Sequential) method

Costs allocations are performed in a step-down fashionto other support departments and producingdepartments using predetermined ranking procedures.

Reciprocal method

Recognizes interactions of support departments priorto allocation to producing departments

Support Dept. Cost Allocation Methods


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Bybee Stone (Direct Method)Allocation Methods - Illustration


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600,000

$250,000 = $187,500600,000 + 200,000

Direct allocation

200,000

$250,000 = $62,500600,000 + 200,000

4,500 $160,000 = $80,000

4,500 + 4,500

4,500

$160,000 = $80,0004,500 + 4,500

Allocate Power Dept costs based on kilowatt-hours:

Grinding

Assembly

Grinding

Assembly

Allocate Maintenance Dept costs based onmaintenance-hours:


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Direct allocation


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Rank support departments based on level of service toother service departments

Allocate First allocate support departments direct cost to all other

support departments and producing departments Next allocate support departments costs (direct +

previously allocated) to subsequent support and producing

Next allocate support departments costs (direct +previously allocated) to subsequent support andproducing.

Once a support departments costs are allocated itnever receives a subsequent allocation

Step (sequential) allocation


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Allocation Methods (Step Method) -Illustration

Power department first because 20% of its costs are used by maintenance,

while only 10% of maintenance are used by power.


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Step (Sequential) allocation

200,000 Maint kWh $250,000 = $50,000

200,000 600,000 200,000

+ +Maint kWh Grinding kWh Assembly kWh

Step 1: Allocate Power Dept costs based on kilowatt-hours (20% to Maint. Dept vs. 10% from Maint. to Power):

To Maintenance

600,000 Grinding kWh

$250,000 = $150,000200,000 600,000 200,000+ +

Maint kWh Grinding kWh Assembly kWh

200,000 Assembly kWh

$250,000 = $50,000200,000 600,000 200,000+ +

Maint kWh Grinding kWh Assembly kWh

To Grinding

To Assembly


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Sequential allocation

Step 2: Allocate Maintenance Dept costs (direct+ allocated) based on maintenance-hours:

4,500 Grinding

$210,000 = $105,0004,500 4,500+

Grinding Assembly

To Grinding

Costs to allocate: $160,000 direct + $50,000 allocated = $210,000

To Assembly 4,500 Assembly

$210,000 = $105,0004,500 4,500+

Grinding Assembly


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Sequential allocation


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Considers all reciprocal flows simultaneously

Allocate

Develop equations for each service departmentrepresenting cost to be allocated plus cost allocatedfrom other service departments

Solve system of equations by substitution.

Most accurate of all methods

Reciprocal allocation


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Utilize a series of simultaneous linear equations

M = $160,000 + .2PM = $160,000 + .2($250,000 + .1M)

M = $214,285.71

P = $250,000 + .1M

P = $250,000 + .1($214,285.71)P = $271,428.57


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271,429 * .60 = 162,857 to grinding271,429 * .20 = 54,286 to assembly271,429 * .20 = 54,286 to maintenance

Power Department

214,286 * .45 = 96,429 to grinding214,286 * .45 = 96,429 to assembly214,286 * .10 = 21,429 to power

Maintenance Department


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After we allocate costs to each department we can

still use ABC to allocate costs to specific products

Departmental Allocations and ABC

DepartmentalCost Methods

SupportDept.Costs

ProducingDept.Costs

ProducingDept.Costs

Products

Products

Products

Products

ABCCost Methods


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Single and Dual Rates

Often firms have difficulty distinguishing fixed andvariable costs

Firms could use dual allocation, which separates

variable and fixed costs and traces the variablecosts directly to the departments that caused thecost

We will focus on single allocation in this class.


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Williams Company produces two software products (NetA and NetB)in two separate departments (A and B). These products arehighly regarded network-maintenance programs. NetA is used for

small networks and NetB is used for large networks. Williams isknown for the quality of its products and its ability to meet datespromised for software upgrades. Department A produces NetAand Department B produces NetB. The production departmentsare supported by two support departments, systems design andprogramming services. The source and use of the supportdepartment time are summarized below:

From Design Programming Dept. A Dept. B

Design 0 4,000 3,000 9,000 16,000

Programming 600 0 600 800 2,000

Total Labor-

Hours

To


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What are the costs allocated to the two production departments from the two

service departments using the direct method.


Design 0 4,000 3,000 9,000 16,000

Programming 600 0 600 800 2,000

Total Labor-Hours

To


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What are the costs allocated to the two production departments from the two

service departments using the step method.


Design 0 4,000 3,000 9,000 16,000

Programming 600 0 600 800 2,000

Total Labor-Hours

To

Design Programming Dept. A Dept. B Total

The Step Method

First Step

Programming Service % 30.00% 30.00% 40.00%

Amount 21,000 (70,000)$ 21,000 28,000

Second StepDesign Service % 18.75% 56.25%

Allocation percent per direct method 25.00% 75.00%

Amount (95,000) 23,750 71,250

Totals for Production Departments 44,750 99,250 144,000

Support Departments Producing Departments


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What are the costs allocated to the two production departments from the twoservice departments using the reciprocal method.

Design = $74,000 + (0.30 x Programming)Programming = $70,000 + (0.25 x Design)

Design = $102,702.70Programming = $ 95,675.68

(102,702.70) 25,675.68

28,702.70-0- -0-


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Recommended Problems

15-19 & 15-20

(15-20 only Reciprocal Method)

Required Problems

15-21 & 15-22

Documents

CH15+Departmental+Costing+Oncourse 3