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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Service Department AllocationsAppendix 4B
4B-2
Operating Departments
An operating department carries out the central purpose of the organization.
An operating department carries out the central purpose of the organization.
The Surgery Department
at Mount Sinai
Hospital.
The Surgery Department
at Mount Sinai
Hospital.
The Production
Departments at
Mitsubishi.
The Production
Departments at
Mitsubishi.
The Geography Department
at the University of Washington.
The Geography Department
at the University of Washington.
4B-3
Service Departments
Service departments do not directly engage in operating activities.
Service departments do not directly engage in operating activities.
The Accounting Department at Macy’s.
The Accounting Department at Macy’s.
The Human Resources Department
at Walgreens.
The Human Resources Department
at Walgreens.
The Cafeteria at Genesco.
The Cafeteria at Genesco.
The Internal Audit Department at
Exxon.
The Internal Audit Department at
Exxon.
4B-4
Interdepartmental Services
ServiceDepartment
ServiceDepartment
OperatingDepartmentOperating
Department
Costs of the service department become overhead costs to
the operating department.
4B-6
Reciprocal Services
ServiceDepartment 1
ServiceDepartment 2
When service departments provide
services to each other we call them
reciprocal services.
4B-7
Learning Objective 10
Allocate service department costs to
operating departments using the direct method.
4B-8
Direct Method
Service Department(Cafeteria)
Service Department(Custodial)
Operating Department(Machining)
Operating Department(Assembly)
Interactionsbetween servicedepartments areignored and all
costs areallocated directly
to operatingdepartments.
Interactionsbetween servicedepartments areignored and all
costs areallocated directly
to operatingdepartments.
4B-9
Direct Method – An Example
Service Departments Operating Departments
Cafeteria Custodial Machining AssemblyDepartmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$ Number of employees 15 10 20 30 Square feet occupied 5,000 2,000 25,000 50,000
Service Department Allocation Base
Cafeteria Number of employeesCustodial Square feet occupied
4B-10
Direct Method – An Example
Service Departments Operating Departments
Cafeteria Custodial Machining AssemblyDepartmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$
Cafeteria allocation ? ? ?
Custodial allocation ? ? ?
Total after allocation ? ? ? ?
How much of the Cafeteria and Custodial costs should be allocated to each operating department
using the direct method of cost allocation?
4B-11
Service Departments Operating Departments
Cafeteria Custodial Machining AssemblyDepartmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$
Cafeteria allocation (360,000) 144,000 ?
Custodial allocation ? ? ?
Total after allocation $ 0 ? ? ?
Direct Method – An Example
Allocation base: Number of employees Allocation base: Number of employees
4B-12
Service Departments Operating Departments
Cafeteria Custodial Machining AssemblyDepartmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$
Cafeteria allocation (360,000) 144,000 216,000
Custodial allocation ? ? ?
Total after allocation $ 0 ? ? ?
Direct Method – An Example
Allocation base: Number of employees
$360,000 ×30
20 + 30= $216,000
4B-13
Service Departments Operating Departments
Cafeteria Custodial Machining AssemblyDepartmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$
Cafeteria allocation (360,000) 144,000 216,000
Custodial allocation (90,000) 30,000 ?
Total after allocation $ 0 $ 0 574,000$ ?
Direct Method – An Example
Allocation base: Square feet occupied Allocation base: Square feet occupied
$90,000 ×25,000
25,000 + 50,000 = $30,000
4B-14
Service Departments Operating Departments
Cafeteria Custodial Machining AssemblyDepartmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$
Cafeteria allocation (360,000) 144,000 216,000
Custodial allocation (90,000) 30,000 60,000
Total after allocation $ 0 $ 0 574,000$ 976,000$
Direct Method – An Example
Allocation base: Square feet occupied Allocation base: Square feet occupied
4B-15
Learning Objective 11
Allocate service department costs to
operating departments using the step-down
method.
4B-16
Operating Department(Machining)
Operating Department(Assembly)
Step-Down Method
Service Department(Cafeteria)
Service Department(Custodial)
Once a servicedepartment’s costs
are allocated, other service
department costsare not allocated
back to it.
4B-17
Step-Down Method There are three key points to understand regarding the
step-down method: In both the direct and step-down methods, any
amount of the allocation base attributable to the service department whose cost is being allocated
is always ignored. Any amount of the allocation base that is attributable to a service department whose cost has already been allocated is ignored. Each service department assigns its own costs to operating departments plus the costs that have been allocated to it from other service departments.
4B-18
Service Departments Operating Departments
Cafeteria Custodial Machining AssemblyDepartmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$ Number of employees 15 10 20 30 Square feet occupied 5,000 2,000 25,000 50,000
Service Department Allocation Base
Cafeteria Number of employeesCustodial Square feet occupied
Recall the data used in the direct method example.Recall the data used in the direct method example.
Step-Down Method – An Example
4B-19
Service Departments Operating Departments
Cafeteria Custodial Machining AssemblyDepartmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$
Cafeteria allocation ? ? ? ?
Custodial allocation ? ? ?
Total after allocation ? ? ? ?
Allocate Cafeteria costs first sinceit provides more service than Custodial.
Allocate Cafeteria costs first sinceit provides more service than Custodial.
Step-Down Method – An Example
4B-20
Service Departments Operating Departments
Cafeteria Custodial Machining AssemblyDepartmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$
Cafeteria allocation (360,000) 60,000 ? ?
Custodial allocation ? ? ?
Total after allocation $ 0 ? ? ?
$360,000 ×10
10 + 20 + 30= $60,000
Allocation base: Number of employees Allocation base: Number of employees
Step-Down Method – An Example
4B-21
Service Departments Operating Departments
Cafeteria Custodial Machining AssemblyDepartmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$
Cafeteria allocation (360,000) 60,000 120,000 ?
Custodial allocation ? ? ?
Total after allocation $ 0 ? ? ?
$360,000 ×20
10 + 20 + 30= $120,000
Allocation base: Number of employees Allocation base: Number of employees
Step-Down Method – An Example
4B-22
Service Departments Operating Departments
Cafeteria Custodial Machining AssemblyDepartmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$
Cafeteria allocation (360,000) 60,000 120,000 180,000
Custodial allocation ? ? ?
Total after allocation $ 0 ? ? ?
$360,000 ×30
10 + 20 + 30= $180,000
Allocation base: Number of employees Allocation base: Number of employees
Step-Down Method – An Example
4B-23
Service Departments Operating Departments
Cafeteria Custodial Machining AssemblyDepartmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$
Cafeteria allocation (360,000) 60,000 120,000 180,000
Custodial allocation (150,000) ? ?
Total after allocation $ 0 $ 0 ? ?
New total = $90,000 original Custodial cost plus $60,000 allocated from the Cafeteria.
Step-Down Method – An Example
4B-24
Service Departments Operating Departments
Cafeteria Custodial Machining AssemblyDepartmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$
Cafeteria allocation (360,000) 60,000 120,000 180,000
Custodial allocation (150,000) 50,000 ?
Total after allocation $ 0 $ 0 570,000$ ?
$150,000 ×25,000
25,000 + 50,000 = $50,000
Allocation base: Square feet occupied Allocation base: Square feet occupied
Step-Down Method – An Example
4B-25
Service Departments Operating Departments
Cafeteria Custodial Machining AssemblyDepartmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$
Cafeteria allocation (360,000) 60,000 120,000 180,000
Custodial allocation (150,000) 50,000 100,000
Total after allocation $ 0 $ 0 570,000$ 980,000$
$150,000 ×50,000
25,000 + 50,000 = $100,000
Allocation base: Square feet occupied Allocation base: Square feet occupied
Step-Down Method – An Example
4B-26
Reciprocal Method
Interdepartmentalservices are given
full recognitionrather than partialrecognition as withthe step method.
Service Department(Cafeteria)
Service Department(Custodial)
Operating Department(Machining)
Operating Department(Assembly)
Because of its mathematical complexity, the reciprocal method is rarely used.
Because of its mathematical complexity, the reciprocal method is rarely used.
4B-27
Quick Check Datafor Direct and Step-Down Methods
Service Departments Operating Departments
ADMIN BACS Accounting OthersDepartmental costs before allocation 180,000$ 90,000$ 190,000$ 900,000$ Number of employees 15 5 20 80 Number of PCs 12 20 18 102
Allocation bases:Business school administration costs (ADMIN): Number of employees
Business Administration computer services (BACS): Number of personal computers
The direct method of allocation is used.
4B-28
Quick Check How much cost will be allocated from
Administration to Accounting?a. $ 36,000b. $144,000c. $180,000d. $ 27,000
4B-29
How much cost will be allocated from Administration to Accounting?a. $ 36,000b. $144,000c. $180,000d. $ 27,000
Quick Check
Service Departments Operating Departments
ADMIN BACS Accounting OthersDepartmental costs before allocation 180,000$ 90,000$ 190,000$ 900,000$ ADMIN allocation (180,000) 36,000 144,000
$180,000 ×20
20 + 80= $36,000
4B-30
Quick Check
How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department?a. $ 52,500b. $135,000c. $270,000d. $ 49,500
4B-31
How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department?a. $ 52,500b. $135,000c. $270,000d. $ 49,500
Quick Check Service Departments Operating Departments
ADMIN BACS Accounting OthersDepartmental costs before allocation 180,000$ 90,000$ 190,000$ 900,000$ ADMIN allocation (180,000) 36,000 144,000 BACS allocation - (90,000) 13,500 76,500
Total after allocation -$ -$ 239,500$ 1,120,500$
4B-32
Quick Check DataService Departments Operating Departments
ADMIN BACS Accounting OthersDepartmental costs before allocation 180,000$ 90,000$ 190,000$ 900,000$ Number of employees 15 5 20 80 Number of PCs 12 20 18 102
Allocation bases:Business school administration costs (ADMIN): Number of employees
Business administration computer services (BACS): Number of personal computers
Allocation bases:Business school administration costs (ADMIN): Number of employees
Business administration computer services (BACS): Number of personal computers
The step-down method of allocation is used.
4B-33
Quick Check
How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department?a. $35,250b. $49,072c. $18,000d. $26,333
4B-34
How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department?a. $35,250b. $49,072c. $18,000d. $26,333
Quick Check
Service Departments Operating Departments
ADMIN BACS Accounting OthersDepartmental costs before allocation 180,000$ 90,000$ 190,000$ 900,000$ ADMIN allocation (180,000) 8,571 34,286 137,143 BACS allocation - (98,571) 14,786 83,786
Total after allocation -$ -$ 239,072$ 1,120,929$