Cost management accounting and control 6e by hansen mowen guan chapter 07

COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan Chapter Allocating Costs of Support Departments and Joint Products COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning Cengage Learning and South-Western are trademarks used herein under license Study Objectives Describe the difference between support departments and producing departments Calculate charging rates, and distinguish between single and dual charging rates Allocate support center costs to producing departments using the direct method, the sequential method, and the reciprocal method Calculate departmental overhead rates Identify the characteristics of the joint production process, and allocate joint costs to products An Overview of Cost Allocation • Allocation is dividing a pool of costs and assigning those costs to subunits • The cost objects must be determined • Cost objects are usually departments – Producing: creating products sold to customers – Support: provide essential services for producing departments Departmentalization: Manufacturing Firm Departmentalization: Service Firm Allocating Support Department Costs to Producing Departments Steps: • Departmentalize the firm • Classify each department as support or producing • Trace all overhead costs in the firm to the appropriate department • Allocate support department costs to producing departments • Calculate predetermined overhead rate for producing departments • Allocate overhead to units produced An Overview of Cost Allocation Allocating One Department’s Costs to Another Department • The costs of a support department are often allocated through the use of a charging rate • Major factors of rate selection: – Choice of single or dual rate – Use of budgeted or actual support department costs Allocating One Department’s Costs to Another Department Single = Fixed costs + estimated variable costs rate estimated usage Dual rate: Fixed rate and a variable rate • Developing a fixed rate – Determine budgeted fixed costs – Compute allocation ratio – Allocate • Developing the variable rate – Depends on the costs that change as the activity driver changes Allocating One Department’s Costs to Another Department When allocating support department costs, should actual or budgeted costs be allocated? Answer: Budgeted – to prevent the transfer of efficiencies or inefficiencies from one department to another 10 Choosing a Support Department Cost Allocation Method 26 Departmental Overhead Rates and Product Costing After allocating all support service costs to producing departments, an overhead rate is calculated for each department �Allocated � � Producing � �service � � department � � costs � � � overhead costs � � � � Measure of activity 27 Departmental Overhead Rates and Product Costing A product cost can now be determined: Direct materials + Direct labor + Assigned overhead Product cost 28 Accounting for Joint Production Processes • Joint products are two or more products produced simultaneously by the same process up to a “split-off” point – The split-off point is the point at which the joint products become separate and identifiable • Separable costs are easily traced to individual products and offer no particular problem 29 Accounting for Joint Production Processes 30 Accounting for Joint Production Processes 31 Accounting for Joint Production Processes • The distinction between joint and byproducts rests solely on the relative importance of their sales value • A by-product is a secondary product recovered in the course of manufacturing a primary product – Joint costs are not typically allocated – Sales revenue is classified as “other income” – Post-split-off processing costs are deducted from sales revenue 32 Joint Cost Allocation Methods • Physical Units Method – Presumes that each unit of the final product costs as much to produce as any other • Weighted Average Method – Applies weight factors to reflect differing materials, complexity, time, etc 33 Joint Cost Allocation: Physical Units Method A sawmill processes logs into four grades of lumber and incurs total joint costs of $186,000: 34 Joint Cost Allocation: Weighted Average Method A peach canning factory purchases $5,000 of peaches and grades and cans them by quality 35 Joint Cost Allocation Methods • Sales-Value-at-Split-Off-Method – Allocates joint cost based on each product’s proportionate share of sales value at split-off • Net Realizable Value Method – Allocates joint cost based on hypothetical market price (eventual market value minus processing costs beyond split-off) • Constant Gross Margin Percentage Method – Allocates joint costs such that the gross margin is the same for each product 36 Joint Cost Allocation: Sales-Value-at-Split-Off Method A sawmill processes logs into four grades of lumber and incurs total joint costs of $186,000: 37 Joint Cost Allocation: Net Realizable Value Method A company manufactures two products, Alpha and Beta, from a joint process One production run costs $5,750 and results in 1,000 gallons of Alpha and 3,000 gallons of Beta The separable cost for Alpha is $1 per gallon and for Beta is $2 per gallon 38 Joint Cost Allocation: Constant Gross Margin Method Determine gross margin percentage Joint cost allocation 39 COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan End Chapter COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning Cengage Learning and South-Western are trademarks used herein under license 40 ... of Cost Allocation • Allocation is dividing a pool of costs and assigning those costs to subunits • The cost objects must be determined • Cost objects are usually departments – Producing: creating... support department costs Allocating One Department’s Costs to Another Department Single = Fixed costs + estimated variable costs rate estimated usage Dual rate: Fixed rate and a variable rate... support departments by their direct costs • Allocate – First support department’s direct cost to all other support departments and producing departments – Next support department’s costs (direct +