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Service Department and Joint Cost Allocation
Chapter 11
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Service Department Cost Allocation
• Service Department:Department that provides servicesto other subunits in the organization.
• User Department:Department that uses the functionsof service departments.
L.O. 1 Explain why service costs are allocated.
11 - 2
Cost Allocation: Direct MethodL.O. 2 Allocate service department costs using the direct method.
Service Department:Information Systems
(S1)
User Department:Hilltop Mine
(P1)
Service Department:Administration
(S2)
User Department:Pacific Mine
(P2)
• Direct method:Charges costs of service departments to user departmentswithout making allocations among service departments.
11 - 3
Cost Allocation: Step MethodL.O. 3 Allocate service department costs using the step method.
• The step method allocates some servicedepartment costs to other service departments.
• Once an allocation is made from a servicedepartment no further allocations are madeback to that service department.
• Generally, allocate in order of proportion ofservices provided to other service departments.
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Cost Allocation: Reciprocal MethodL.O. 4 Allocate service department costs using the reciprocal method.
• The reciprocal method recognizes all servicesprovided by any service department, includingservices provided to other service departments.
• It accounts for cost flows among servicedepartments providing services to each other.
• It requires a simultaneous equation solution.
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The Reciprocal Methodand Decision Making
L.O. 5 Use the reciprocal method for decisions.
• Suppose that the variable cost in Information Services (S1)is $200,000 (out of the total of $800,000) and the variablecost in Administration (S2) is $3,500,000 (out of $5,000,000).
• Let's repeat the reciprocal cost analysis substitutingthe variable costs from the total costs.
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The Reciprocal Methodand Decision Making
LO5
• The total variable cost of Information Services, when youconsider the use of Administration by Information Services is $1,000,000.
• The total cost savings that would come from eliminatingInformation Services are the $1,000,000 variable costsplus any avoidable fixed costs.
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Allocation of Joint Costs
L.O. 6 Explain why joint costs are allocated.
• Joint cost is the cost of a manufacturingprocess with two or more outputs.
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Allocation of Joint Costs
• Joint Products
• Outputs from a common inputand common production process
• Split-Off point
• Stage of processing that separatestwo or more products
LO6
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Allocation of Joint CostsLO6
• Evaluating executive performance
• Determining the inventory value
• Net realizable value method
• Physical quantities method
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Allocation of Joint CostsL.O. 7 Allocate joint costs using the net realizable value method.
• Net realizable value method:Joint cost allocation based on the proportionalvalues of the products at the split-off point.
• Net realizable value (NRV):Sales value of each product at the split-off point.
• Estimated net realizable value:Sales price of a final product minus additionalprocessing costs necessary to preparea product for sale.
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Physical Quantities MethodL.O. 8 Allocate joint costs using the physical quantities method.
• Joint cost allocation is based on measurement ofthe volume, weight, or other physical measure ofthe joint products at the split-off point.
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Sell or Process FurtherL.O. 9 Explain how cost data are used in
the sell-or-process-further decision.
• Suppose CCC can sell Lo-grade coal for $450,000at the split-off point or process it further to makemid-grade coal.
• Mid-grade coal would sell for $550,000 andadditional processing costs would be $50,000.
Additional revenue: $100,000Additional cost: $ 50,000 ??
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Sell or Process FurtherLO9
Differential AnalysisCarlyle Coal Company
RevenuesLess: Separate processing costsMargin
$450,000 -0-$450,000
$550,000 50,000$500,000
$100,000 50,000$ 50,000
SellLo-Grade
Coal
ProcessFurther
(Mid-Grade)
DifferentialRevenue/
Costs
Net gain fromprocessing
further
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Deciding What to Do with By-productsL.O. 10 Account for by-products.
• By-products are outputs of joint production processesthat are relatively minor in quantity or value.
• Method 1:The net realizable value from sale of the by-productsis deducted from the joint costs before allocationto the main products.
• Method 2:The proceeds from sale of the by-product are treatedas other revenue.
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Calculation of the Reciprocal Method Using Spreadsheets
L.O. 11 (Appendix) Use spreadsheets to solvereciprocal cost allocation problems.
• For any department, we can state the equation:Total costs = Direct costs + Allocated costs
• Equations can be expressed in matrix form andsolved using the matrix functions of a spreadsheetprogram such as Microsoft Excel®.
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End of Chapter 11
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin