PPAk kuliah 3

8/12/2019 PPAk kuliah 3

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PowerPoint Presentation by

Gail B. WrightProfessor Emeritus of Accounting

Bryant University

Copyright 2007 Thomson South-Western, a part of The

ThomsonCorporation. Thomson, the Star Logo, and

South-Western are trademarks used herein under license.

MANAGEMENT

ACCOUNTING

8thEDITION

BY

HANSEN & MOWEN

7SUPPORT-DEPARTMENT COSTALLOCATION


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ALLOCATION: Definition

A means of dividing a pool of

costs & assigning it to various

subunits.

LO 1


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COST ALLOCATION

While cost allocation does not affecttotal product cost, it will affectpricing & profitability of individualproducts depending on methodused.

LO 1


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COMMON COSTS: Definition

Mutually beneficial costs whichoccur when the same resource is

used in output of 2 or more

services or products.

LO 1


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TYPES OF DEPARTMENTS

Producing departments are directlyresponsible for creating products,services sold. Support departmentsprovide essential support servicesfor producing departments.

LO 1


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OBJECTIVES OF

ALLOCATION

To obtain a mutually agreeable price

To compute product-line profitabilityTo predict the economic effects of planning &

control

To value inventoryTo motivate managers

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COMPETITIVE PRICING

Requires understanding costs

Overstating leads to loss of business

Understating produces losses

Leads to evaluating product or service mix

Dropping some services

Reallocating resources

Repricing

LO 1


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Department that uses the functions ofservice departments.

Department that provides service toother subunits in the organization.

Cost center whose costs are chargedto other departments in the

organization.

Service Department Cost Allocation

Service Department User Department

Intermediate Cost Center

Cost center, such as a production ormarketing department, whose costs

are not allocated to another costcenter.

Final Cost Center


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Service Department: InformationSystems (S1)

Service Department:Administration (S2)

User Department: HilltopMine (P1)

User Department: PacificMine (P2)


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Service Department Cost Allocation Continued

Carlyle Coal Company

Information Systems (S1)

Total S1 Costs $800,000

Allocation Base: Computer Hours

User Department Number of Hours Used Percent of Total

Administration (S2) 100,000 50%Hilltop Mine (P1) 20,000 10%Pacific Mine (P2) 80,000 40%

Totals 200,000 100%


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Service Department Cost Allocation Continued

Carlyle Coal CompanyAdministration (S2)

Total S2 Costs $5,000,000

Allocation Base: EmployeesUser Department Employees Percent of Total

Information Systems (S1) 2,000 20%Hilltop Mine (P1) 5,000 50%Pacific Mine (P2) 3,000 30%

Totals 10,000 100%


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Direct Method

Charges costs of service departments to userdepartments without making allocations

between or among service departments.

Direct Method

S1 S2

P1 P2


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Cost Allocation: Direct Method


Service Department Direct Cost P1 P2 Total

S1 800,000$ 20.0% a 80.0% 100.0%S2 5,000,000$ 62.5%

b37.5% 100.0%

Percent Allocable to

a 20% = 20,000 hours/(20,000 hours + 80,000 hours)b 62.5% = 5,000 employees/(5,000 employees + 3,000 employees)


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Service Department Direct Cost P1 P2 Total

S1 800,000$ 20.0%a

80.0% 100.0%

S2 5,000,000$ 62.5%b

37.5% 100.0%


a 20% = 20,000 hours/(20,000 hours + 80,000 hours)b 62.5% = 5,000 employees/(5,000 employees + 3,000 employees)

S1 800,000$ 160,000$ c 640,000$ 800,000$

S2 5,000,000$ 3,125,000$ d 1,875,000$ 5,000,000$

Total allocated 5,800,000$ 3,285,000$ 2,515,000$ 5,800,000$

Cost Allocation: Direct Method Continued

c$160,000 = 20% x $800,000

d$3,125,000 = 62.5% x $5,000,000


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Step Method

Allocates some service department costs toother service departments.

Once an allocation is made from a service department no further allocations are

made back to that service department. Generally allocate in order of proportionof services provided to other service departments.

S1 S2

P1 P2


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Cost Allocation: Step Method

Service Department Cost AllocationService Department Direct Cost S1 S2 P1 P2 Total

S1 800,000$ 0% 50%a

10.0%b

40.0%c

100.0%

S2 5,000,000$ 0% 0% 62.5%d

37.5%e

100.0%


a50% = 100,000 hours/(100,000 hours + 20,000 hours + 80,000 hours)

b 10% = 20,000 hours/(100,000 hours + 20,000 hours + 80,000 hours)c 40% = 80,000 hours/(100,000 hours + 20,000 hours + 80,000 hours)d 62.5% = 5,000 employees/(5,000 employees + 3,000 employees)e 37.5% = 3,000 employees/(5,000 employees + 3,000 employees)


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Cost Allocation: Step Method Continued

f= 50% x $800,000

g= 10% x $800,000h= 40% x $800,000i= 62.5% x $5,400,000j= 37.5% x $5,400,000


k$5,800,000 of service department

costs were ultimately allocated toproduction departments.

From S1 S2 P1 P2 Total

800,000$ 5,000,000$ 5,800,000$ k

S1 (800,000) 400,000 f 80,000 g 320,000 h

S2 0 (5,400,000) 3,375,000 i 2,025,000 j

Total 0 0 3,455,000$ 2,345,000$ 5,800,000$ k

To


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Reciprocal MethodL.O. 4 Allocate service department costs using the reciprocal method.

Recognizes all services provided by anyservice department, including servicesprovided to other service departments.

Reciprocal method accounts for cost flowsamong service departments providingservices to each other.

Requires a simultaneousequation solution.

S1 S2

P1 P2


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The Simultaneous Equation

1. Write the costs of each servicedepartment in equation form.

Total Service

Department

Direct cost of the

service department

Cost allocated from other

service departments

2. Solve equations

simultaneously using

matrix algebra.

= +


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Cost Allocation: Reciprocal Method

S2 = $5,000,000 + $400,000 + 0.10 S2

S2 = $6,000,000

1. S1 = $800,000 + 0.20 S2

2. S2 = $5,000,000 + 0.50 S1

S2 = $5,000,000 + 0.50 $800,000 + 0.20 S2

.90 S2 = $5,400,000


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Cost Allocation: Reciprocal Method Continued

S1 = $800,000 + 0.20 $6,000,000

S1 = $2,000,000


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Reciprocal Method: An Exampled Continued


Service Department Total Costs S1 S2 P1 P2 Total

S1 2,000,000$ 0% 50% a 10.0% b 40.0% c 100.0%

S2 6,000,000$ 20% d 0% 50.0% e 30.0% f 100.0%


a50% = 100,000 hours/(100,000 hours + 20,000 hours + 80,000 hours)

b10% = 20,000 hours/(100,000 hours + 20,000 hours + 80,000 hours)

c40% = 80,000 hours/(100,000 hours + 20,000 hours + 80,000 hours)

d20% = 2,000 employees/(2,000 employees + 5,000 employees + 3,000 employees)

e50% = 5,000 employees/(2,000 employees + 5,000 employees + 3,000 employees)

f30% = 3,000 employees/(2,000 employees + 5,000 employees + 3,000 employees)


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Reciprocal Method: An Exampled Continued


From S1 S2 P1 P2 Total

Direct costs 800,000$ 5,000,000$ 5,800,000$ i

S1 (2,000,000) a 1,000,000 b 200,000 c 800,000 d

S2 1,200,000e

(6,000,000)f

3,000,000g

1,800,000h

Total 0 0 3,200,000$ 2,600,000$ 5,800,000$ i

To

a Total costs of S1b Costs allocated from S1 (50% x $2,000,000)c

10% x $2,000,000d 40% x $2,000,000e Costs allocated from S2 (20% x $6,000,000)f Total costs of S2g 50% x $6,000,000h 30% x $6,000,000

i$5,800,000 of service department

costs were ultimately allocated toproduction departments.


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Comparison of Direct, Step and Reciprocal Method

Method Hilltop Mine Pacific Mine Total

Direct 3,285,000$ 2,515,000$ 5,800,000$

Step 3,455,000 2,345,000 5,800,000Reciprocal 3,200,000 2,600,000 5,800,000

Cost Allocated to


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Joint Cost

Joint Product

Split-Off Point

Cost of a manufacturing process withtwo or more outputs.

Outputs from a common input andcommon production process.

Stage of processing that separatestwo or more products.

Joint Cost


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Joint Cost ContinuedJoint Cost Flows

Mining Costs:$270,000

Split-offPoint

Hi-Grade Coal:15,000 units

Sales Value$300,000

Lo-Grade Coal:30,000 units

Sales Value$450,000


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Allocation of Joint CostsL.O. 5 Explain why joint costs are allocated.

Evaluating executive

performance

Valuing

products

Net realizable

value method

Physical quantities

method

LO 5


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ACCOUNTING FOR JOINT

PRODUCT COSTS

LO 5

3 methods

Physical units: joint costs distributed on basis of

physical units

Sales-value-at-split-off: joint costs distributed on

basis of sales value at split-off

Net realizable value: joint costs distributed on

basis of hypothetical sales value

By-products: because insignificant sales value,

no joint cost allocation

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