CHAPTER 13 PowerPoint Presentation by LuAnn Bean Professor of Accounting Florida Institute of Technology Allocating Costs To Responsibility Centers © 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Managerial Accounting 11E Maher/Stickney/Weil ☼ CHAPTER GOAL Chapter 13 discusses concepts and methods of assigning indirect costs such as overhead, to departments Additionally, service department cost allocation and joint-process cost allocation are explained ☼ LO DIRECT DIRECT COST: COST: Definition Definition Is one that firms can identify specifically with, or trace directly to a particular product, department, or process LO INDIRECT INDIRECT COST: COST: Definition Definition Results from joint use of a facility or service by several products, departments, or processes LO MANAGERS WANT TO KNOW! What are common costs? Common costs are indirect costs that cannot be identified by a cost object LO MANAGERS WANT TO KNOW! Why allocate indirect costs to products? Full product costs should be known, including allocated indirect costs, for pricing and planning decisions LO SERVICE DEPARTMENT Service department costs, a source of indirect costs, should be charged to users because: These costs should be covered by the contribution margin of revenue-generating departments User departments must be aware of what costs their department must cover User departments should not treat service departments as if they are free LO COST ALLOCATION The cost allocation process has three steps: 1) Assign direct costs to departments 2) Allocate indirect costs to departments 3) Allocate service department costs to production departments F B LO EXAMPLE: First Bank First Bank (FB) has departments Production departments are the Commercial Department and the Personal Department Service departments are Computer Services and Processing Indirect costs are allocated to each department Service department costs are allocated to production departments in order to properly price their products Continued LO F B What Whatdepartment department would wouldbe be responsible responsiblefor forcost cost allocation allocationand and preparing preparing accounting accounting reports reportsfor for managerial managerialuse? use? EXHIBIT 13.1 F B LO ALLOCATION First First Bank Bank has has four four indirect indirect costs: costs: security, security, property property taxes, taxes, rent rent and and utilities utilities and and miscellaneous miscellaneous When When allocating allocating indirect indirect costs, costs, First First Bank Bank must must select select aa cost cost driver driver for for each each indirect indirect cost, cost, although although miscellaneous miscellaneous costs costs may may not not have have aa cost cost driver driver LO F B Cost Costdrivers driversfor for First FirstBank’s Bank’s indirect indirectcosts costs Miscellaneous Miscellaneous costs costswill willbe be allocated allocated evenly evenly EXHIBIT 13.4 LO F B EXHIBIT 13.5 Example: Example: proportionate proportionate allocation allocationof of indirect indirectcosts costs based basedon on department departmentuse use of ofindirect indirect costs costs LO Allocation Allocationof of security securitycosts coststoto four four departments departments Cost Costdriver: driver:##of of security securityvisits visits EXHIBIT 13.6 LO Allocation Allocationof of property propertytax tax costs coststotofour four departments departments Cost Costdriver: driver:book book value valueof ofassets assets EXHIBIT 13.6 LO Allocation Allocationof of rent rentand andutilities utilities totofour four departments departments Cost Costdriver: driver:floor floor space space EXHIBIT 13.6 LO Step Step3:3:Allocate Allocateservice service department departmentcosts coststotoproduction production departments departments EXHIBIT 13.2 LO MANAGERS WANT TO KNOW! How should service department costs be allocated? Service department costs should be allocated by one of three methods: direct, step, or reciprocal SERVICE DEPARTMENT ALLOCATIONS Under Under the the direct direct method, method, service service department department costs costs are are only only allocated allocated to to production production departments departments Under Under the the step step method, method, service service department department costs costs are are sequentially sequentially allocated allocated to to other other service service departments departments pro pro rata rata and and finally finally to to production production departments departments The The reciprocal reciprocal method method employs employs matrix matrix algebra algebra to to simultaneously simultaneously allocate allocate all all department department costs costs to to each each other other LO MARKETING and ADMINISTRATIVE COSTS Allocating Allocating marketing marketing and and administrative administrative costs costs and and finding finding aa basis basis for for allocation allocation are are difficult difficult They They are are separate separate from from overhead overhead costs costs that that are are allocated allocated to to production production departments departments But But allocation allocation is is important important for for pricing pricing and and planning planning decisions decisions LO LO JOINT JOINT PROCESS: PROCESS: Definition Definition Simultaneously converts common input into several outputs Example: timber logs are processed into lumber of various grades and sizes LO SPLITOFF SPLITOFF POINT: POINT: Definition Definition Is the stage of processing when two products are separated LO The NRV method implies a matching of input costs with revenues generated by each output The physical quantities method is used when output product prices are highly volatile or when significant processing occurs between split off and the 1st point of marketability ALLOCATING JOINT-PROCESS COSTS Organizations allocate joint costs for many reasons: Measuring performance Determining and responding to regulatory rate changes Estimating casualty losses Resolving contractual interests and obligations Financial and tax reporting LO End of CHAPTER 13 27 ...☼ CHAPTER GOAL Chapter 13 discusses concepts and methods of assigning indirect costs such as overhead, to departments Additionally, service department cost allocation and joint-process... Determining and responding to regulatory rate changes Estimating casualty losses Resolving contractual interests and obligations Financial and tax reporting LO End of CHAPTER 13 27 ... assets EXHIBIT 13. 6 LO Allocation Allocationof of rent rentand andutilities utilities totofour four departments departments Cost Costdriver: driver:floor floor space space EXHIBIT 13. 6 LO Step