ACCT 102 Management Accounting Lecture 9

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ACCT 102Management AccountingLecture 9
Allocation of Support-Department Costs, Common
Costs, and Revenues
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Cost allocation
Types of departments

• An operating department directly adds value to a
  product or service
• A support department provides the services that
  assist the operating departments

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Cost allocation
Single-rate vs. Dual-rate methods

• Need to allocate both the fixed costs and the
  variable costs of the support department
• Single-rate method Allocates costs in each cost
  pool (i.e., each support department) to cost
  objects (i.e., operating departments) using the
  same rate per unit of a cost-allocation base.
  Advantage simple
• Dual-rate method Classified costs in each cost
  pool into two pools, fixed and variable costs.
  Each pool will then have its own cost-allocation
  base. Advantage better for decisions, e.g.,
  outsourcing

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Cost allocation
Single-rate vs. Dual-rate methods

• When using single-rate or dual-rate methods,
  there is a choice between
• budgeted rate x budgeted quantity (of
  cost-allocation base) used by the operating
  departments
• budgeted rate x actual quantity
• actual rate x actual quantity

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Cost allocation
Budgeted vs. Actual rates

• Advantages of budgeted rate
• More certainty for the operating departments
• Motivate the support department to improve
  efficiency
• Disadvantages of budgeted rate
• Unfavorable cost variances can arise due to price
  increases outside the control of the support
  departments

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Cost allocation
Single-rate vs. Dual-rate methods

• Single-rate
• Budgeted rate x Actual usage
• Dual-rate
• Fixed cost
• Budgeted fixed cost allocation rate x Budgeted
  usage
• Variable cost
• Budgeted variable cost allocation rate x Actual
  usage

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Cost allocation
Allocating costs of multiple support departments

• Support departments can provide reciprocal
  support to each other, as well as to operating
  departments
• Methods to allocate reciprocal department costs
• Direct method
• Step-down method
• Reciprocal method

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Cost allocation
Allocating costs of multiple support departments

• Direct method
• Support departments costs are allocated to
  operating departments only. No recognition of
  mutual services provided among all support
  departments.
• Step-down method
• Support departments costs are allocated in a
  sequential manner that partially recognizes the
  mutual services provided among all supporting
  departments. Ranking of service departments
  required.

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Cost allocation
Allocating costs of multiple support departments

• Reciprocal method
• Support departments costs are allocated in a
  manner that fully recognizes the mutual services
  provided among all supporting departments.
• Solve a set of linear equations (representing
  support-department costs and support-department
  reciprocal relations) to get complete
  reciprocated costs
• Allocate the complete reciprocated costs of each
  support department to all other departments (both
  support departments and operating departments)

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Cost allocation
Allocating costs of multiple support departments

• Use an illustration from Hongren, Datar, and
  Foster (12th edn, p. 537 542)
• Support departments
• Plant maintenance (PM)
• Information systems (IS)
• Operating departments
• Machining (M)
• Assembly (A)
• Usage of support departments resources
• PM (600,000, 20 IS, 30 M, 50 A)
• IS (116,000, 10 PM, 80 M, 10 A)

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Cost allocation
Reciprocal Method

• Step 1 Express support-department costs and
  support-department reciprocal relationships in
  the form of linear equations
• PM 600,000 0.1 IS
• IS 116,000 0.2 PM
• Step 2 Solve the linear equations to obtain the
  complete reciprocated costs of each support
  department
• Step 3 Allocate the complete reciprocated costs
  of each support department to all other
  departments (both support and operating)

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Cost allocation
Allocating common costs

• A common cost is a cost of operating a facility,
  activity, or similar cost object that is shared
  by two or more users. Need to allocate cost to
  the users
• Methods
• Stand-alone cost-allocation method
• Cost-allocation weights based on the relative
  cost of each individual user of a cost object
• Incremental cost-allocation method
• Rank individual users of a cost object in the
  order of users most responsible for common cost.
  Use this ranking to allocate the cost among the
  users

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Cost allocation
Allocating bundled revenue

• A bundled revenue is a revenue from selling a
  bundled product (i.e., a package of two or more
  products). Need to allocate revenue among the
  individual products
• Methods
• Stand-alone revenue-allocation method
• Revenue-allocation weights based on the relative
  selling prices, unit costs, or physical units of
  each product
• Incremental revenue-allocation method
• Rank individual products according to the
  criteria (e.g., most sales) determined by
  management. Use this ranking to allocate the
  revenue among the products