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

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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

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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%

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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:

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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

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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%

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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:

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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

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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

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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.

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