Lecture Managerial accounting: Creating value in a dynamic business environment (10th edition): Chapter 17 - Ronald W. Hilton, David E. Platt

Chapter 17 - Allocation of support activity costs and joint costs. After completing this chapter, you should be able to: Allocate service department costs using the direct method and the step-down method, use the dual approach to service department cost allocation, explain the difference between two-stage cost allocation with departmental overhead rates and activity-based costing (ABC),...

Chapter 17 Allocation of Support Activity Costs and Joint Costs Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Service Department Cost Allocation Service Department (Cafeteria) Service Department (Accounting) Service Department (Personnel) First Stage Allocations Service department costs are allocated to production departments Production Department (Machining) Production Department (Assembly) The Product Second Stage Allocations Production department overhead costs, plus allocated service department costs, are applied to products using departmental predetermined overhead rates 17­2 Selecting Allocation Bases Personnel: Number of employees Typical Allocation Bases Receiving: Units handled Security: Square footage Custodial: Square footage Cafeteria: Number of employees Accounting: Staff hours Power: Kilowatt hours 17­3 Selecting Allocation Bases Personnel: Number of employees Receiving: Units handled Security: Square footage Criteria for selection Simplicity Availability of space or equipment Benefits received by the production department Accounting: Staff hours Custodial: Square footage Cafeteria: Number of employees Power: Kilowatt hours 17­4 Interdepartmental Services Service Department (Cafeteria) Production Department (Machining) POWER DEPARTMENT Service Department (Custodial) Production Department (Assembly) 17­5 Interdepartmental Services Problem Allocating costs when service departments provide services to each other Solutions Direct Method Step-Down Method 17­6 Direct Method Cost of services between service departments are ignored and all costs are allocated directly to production departments Service Department (Cafeteria) Production Department (Machining) Service Department (Custodial) Production Department (Assembly) For an example please see the textbook 17­7 Step-Down Method Service department costs are allocated to other service departments and to production departments, usually starting with the service department that serves the largest number of other service departments Service Department (Cafeteria) Production Department (Machining) Service Department (Custodial) Production Department (Assembly) 17­8 Step-Down Method Once a service department’s costs are allocated, other service departments’ costs are not allocated back to it Service Department (Cafeteria) Production Department (Machining) Service Department (Custodial) Production Department (Assembly) 17­9 Step-Down Method Custodial will have a new total to allocate to production departments: its own costs plus those costs allocated from the cafeteria Service Department (Cafeteria) Production Department (Machining) Service Department (Custodial) Production Department (Assembly) For an example please see the textbook 17­10 Dual Cost Allocation Example SimCo has a maintenance department and two production departments: cutting and assembly Variable maintenance costs are budgeted at $0.60 per machine hour Fixed maintenance costs are budgeted at $200,000 per year Data relating to the current year are: Production Departments Cutting Assembly Total Long-run Maintenance Usage as a % of Total 60% 40% 100% Actual Hours Used 80,000 40,000 120,000 Allocate maintenance costs to the two operating departments 17­12 Dual Cost Allocation Example Cutting Department Variable cost allocation: $0.60 × 80,000 hours used $0.60 × 40,000 hours used Fixed cost allocation 60% of $200,000 40% of $200,000 Total allocated cost $ Assembly Department 48,000 $ 24,000 $ 80,000 104,000 120,000 $ 168,000 Variable costs are allocated based on hours used Fixed costs are allocated based long-run average usage 17­13 The New Manufacturing Environment More More accurate accurate cost cost tracing tracing systems systems reduce reduce the the need need for for allocation allocation of of indirect indirect costs costs 17­14 The Rise of Activity-Based Costing Service Department (Cafeteria) Service Department (Accounting) Service Department (Personnel) First stage allocations are to activities, not departments Activity One The Product Activity Two 17­15 Joint Product Cost Allocation Joint Product Costs Joint Input Oil Joint Production Process Final Sale Separate Processing Costs Gasoline Split-Off Point Separate Processing Separate Processing Final Sale Separate Processing Costs 17­16 Allocating Joint Costs Physical-Units Method Joint Product Costs RelativeSales-Value Method Net-RealizableValue Method 17­17 Allocating Joint Costs Physical-Units Method Allocation based on a physical measure of the joint products at the split-off point Relative-SalesValue Method Allocation based on the relative values of the products at the split-off point Net-RealizableValue Method Allocation based on final sales values less separable processing costs 17­18 Physical-Units Method Joint conversion cost = $225,000 Joint material cost = $275,000 Oil 240,000 gallons Gasoline 360,000 gallons Joint Production Process Split-Off Point 17­19 Physical-Units Method Product Oil Output quantities in gallons Proportionate share: 240,000 ÷ 600,000 360,000 ữ 600,000 Allocated joint costs: $500,000 ì 40% $500,000 × 60% 240,000 Gasoline 360,000 Total 600,000 40% 60% $ 200,000 $ 300,000 $225,000 joint conversion cost plus $275,000 joint material cost 17­20 Relative-Sales-Value Method Joint conversion cost = $225,000 Joint material cost = $275,000 Oil $200,000 sales value at split-off point Gasoline $600,000 sales value at split-off point Joint Production Process Split-Off Point 17­21 Relative-Sales-Value Method Product Oil Sales value at split-off point Proportionate share: $200,000 ÷ $800,000 $600,000 ữ $800,000 Allocated joint costs: $500,000 ì 25% $500,000 × 75% Gasoline Total $ 200,000 $ 600,000 $ 800,000 25% 75% $ 125,000 $ 375,000 $225,000 joint conversion cost plus $275,000 joint material cost 17­22 Net-Realizable-Value Method    If products require further processing beyond  the split­off point before they are marketable,  it may be necessary to estimate the net  realizable value (NRV) at the split­off point Estimated NRV = Final Sales Value – Added Processing Costs 17­23 Net-Realizable-Value Method Joint conversion cost = $225,000 Joint material cost = $275,000 Oil Joint Production Process Separate Processing Costs $200,000 Gasoline Split-Off Point, Sales Value Unknown Sales Value $500,000 Separate Processing Separate Processing Sales Value $1,200,000 Separate Processing Costs $500,000 17­24 Net-Realizable-Value Method Product Oil Sales value Less additional processing costs Estimated NRV at split-off point Proportionate share: $300,000 ÷ $1,000,000 $700,000 ÷ $1,000,000 Allocated joint costs: $500,000 × 30% $500,000 × 70% Gasoline Total $ 500,000 $ 1,200,000 $ 1,700,000 200,000 500,000 700,000 $ 300,000 $ 700,000 $ 1,000,000 30% 70% $ 150,000 $ 350,000 17­25 Reciprocal-Services Method • Fully accounts for reciprocal services • More accurate • Can be combined with dual allocation 17­26 ... RelativeSales -Value Method Net-RealizableValue Method 17? ?17 Allocating Joint Costs Physical-Units Method Allocation based on a physical measure of the joint products at the split-off point Relative-SalesValue... Relative-SalesValue Method Allocation based on the relative values of the products at the split-off point Net-RealizableValue Method Allocation based on final sales values less separable processing... $200,000 sales value at split-off point Gasoline $600,000 sales value at split-off point Joint Production Process Split-Off Point 17? ?21 Relative-Sales -Value Method Product Oil Sales value at split-off