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

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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

Charge to
production
departments at a

budgeted rate times
actual short-run usage of
the allocation base.

Allocate
budgeted amounts
to operating departments
in proportion to the
long-run average
usage of the
allocation base.

Budgeted costs should be allocated to avoid passing on inefficiencies
from the service departments.
17­11


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 ÷ 600,000

Allocated joint costs:
$500,000 × 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 ÷ $800,000
Allocated joint costs:
$500,000 × 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