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11 th Edition Chapter 15

11 th Edition Chapter 15. Service Department Costing: An Activity Approach. Chapter Fifteen. Reasons for Allocating Service Department Costs. To encourage operating departments to wisely use service department resources.

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11 th Edition Chapter 15

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  1. 11th EditionChapter 15

  2. Service Department Costing: An ActivityApproach Chapter Fifteen

  3. Reasons for Allocating Service Department Costs To encourage operatingdepartments to wiselyuse service departmentresources. To provide operatingdepartments with morecomplete cost datafor making decisions. To help measure theprofitability of operatingdepartments. To create incentivefor service departmentsto operate efficiently. To value inventory for external financialreporting purposes. To include all overheadin the cost base when cost-plus pricing is used.

  4. $ ServiceDepartments OperatingDepartments Selecting Allocation Bases The allocation bases used should“drive” the cost being allocated. For example, when allocating costsof the employee cafeteria, the numberof meals served would be a goodchoice for the allocation base.

  5. $ ServiceDepartments OperatingDepartments Selecting Allocation Bases A service department’s costs may beallocated using more than one base. For example, a portion of the human resource departmentcosts might be allocated based on the number of employeesin each operating department and another portion might beallocated based on hours spent in training employees ineach operating department.

  6. Exh. 15-1 Examples of Allocation Bases

  7. Interdepartmental Services Problem Allocating costs when service departmentsprovide services to each other Solutions Direct Method Step Method Reciprocal Method

  8. Interactionsbetween service departments areignored and all costs areallocated directlyto operatingdepartments. Direct Method Service Department (Cafeteria) Operating Department (Machining) Service Department (Custodial) Operating Department (Assembly)

  9. Direct Method Example

  10. Direct Method Example

  11. 20 20 + 30 $360,000 × = $144,000 Direct Method Example Allocation base: Number of employees

  12. 30 20 + 30 $360,000 × = $216,000 Direct Method Example Allocation base: Number of employees

  13. 25,000 25,000 + 50,000 $90,000 × = $30,000 Direct Method Example Allocation base: Square feet occupied

  14. 50,000 25,000 + 50,000 $90,000 × = $60,000 Direct Method Example Allocation base: Square feet occupied

  15. Once a servicedepartment’s costsare allocated, other servicedepartment costsare not allocatedback to it. Step Method Service Department (Cafeteria) Operating Department (Machining) Service Department (Custodial) Operating Department (Assembly)

  16. Step Method There are three key points to understand regarding the step method:  In both the direct and step methods, any amount of the allocation base attributable to the service department whose cost is being allocated is always ignored.  Any amount of the allocation base that is attributable to a service department whose cost has already been allocated is ignored.  Each service department assigns its own costs to operating departments plus the costs that have been allocated to it from other service departments.

  17. Step Method Example We will use the same data used in the direct method example.

  18. Step Method Example Allocate Cafeteria costs first sinceit provides more service than Custodial.

  19. 10 10 + 20 + 30 $360,000 × = $60,000 Allocation base: Number of employees Step Method Example

  20. 20 10 + 20 + 30 $360,000 × = $120,000 Allocation base: Number of employees Step Method Example

  21. 30 10 + 20 + 30 $360,000 × = $180,000 Allocation base: Number of employees Step Method Example

  22. New total = $90,000 original Custodial cost plus $60,000 allocated from the Cafeteria. Step Method Example

  23. 25,000 25,000 + 50,000 $150,000 × = $50,000 Allocation base: Square feet occupied Step Method Example

  24. 50,000 25,000 + 50,000 $150,000 × = $100,000 Allocation base: Square feet occupied Step Method Example

  25. Interdepartmentalservices are givenfull recognitionrather than partialrecognition as withthe step method. Reciprocal Method Service Department (Cafeteria) Operating Department (Machining) Service Department (Custodial) Operating Department (Assembly) Because of its mathematical complexity, the reciprocal method is rarely used.

  26. Revenue Producing Service Departments If a service departmentgenerates revenue, such as acafeteria that charges for the service itprovides, the revenue generated shouldbe offset against the costs incurred.Only the remaining net amountof costs should be allocated to other departments.

  27. Quick Check Datafor Direct and Step Methods The direct method of allocation is used. • Allocation bases: • Business school administration costs (ADMIN): Number of employees • Business Administration computer services (BACS): Number of personal computers

  28. Quick Check  How much cost will be allocated from Administration to Accounting? a. $ 36,000 b. $144,000 c. $180,000 d. $ 27,000

  29. 20 20 + 80 $180,000 × = $36,000 Quick Check  How much cost will be allocated from Administration to Accounting? a. $ 36,000 b. $144,000 c. $180,000 d. $ 27,000

  30. Quick Check  How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department? a. $ 52,500 b. $135,000 c. $270,000 d. $ 49,500

  31. 18 18 + 102 $90,000 × = $13,500 Quick Check  How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department? a. $ 52,500 b. $135,000 c. $270,000 d. $ 49,500

  32. Quick Check Data The step method of allocation is used. • Allocation bases: • Business school administration costs (ADMIN): Number of employees • Business administration computer services (BACS): Number of personal computers

  33. Quick Check  How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department? a. $35,250 b. $49,072 c. $18,000 d. $26,333

  34. Quick Check  How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department? a. $35,250 b. $49,072 c. $18,000 d. $26,333

  35. Allocating Costs by Behavior When possible,variable and fixedservice department costsshould be allocatedseparately.

  36. Allocating Costs by Behavior Variable servicedepartment costs should beallocated to consuming departmentsaccording to the activitycausing incurrence of the cost.

  37. Allocating Costs by Behavior Allocate fixed service department costs to consuming departments in predeterminedlump-sum amounts that are based on theconsuming departments’ peak or long-runaverage needs. Fixed cost allocations: Are based on amounts ofcapacity each consumingdepartment requires. Should not vary fromperiod to period.

  38. Allocating Costs by Behavior Budgeted variableand fixed service departmentcosts should be allocated tooperating departments.

  39. Allocating Costs by Behavior If variable cost allocations are made at thebeginning of the year, the budgeted variablerate should be multiplied by the budgetedactivity level of each consuming department. Allocations madeat the beginning of theyear provide data forpricing and otherdecisions.

  40. Allocating Costs by Behavior If variablecost allocations are made at theendof the year, thebudgeted variablerate should be multiplied by theactualactivity level of each consuming department. Allocations made atthe end of the year providedata for performanceevaluation.

  41. SimCo: An Example SimCo has a maintenance department and two operatingdepartments: cutting and assembly. Variable maintenancecosts are budgeted at $0.60 per machine hour. Fixedmaintenance costs are budgeted at $200,000 per year.Data relating to the current year are: Allocate maintenance costs to the two operating departments.

  42. Hours planned SimCo: Beginning of the Year

  43. Hours planned Percent of peak-period capacity. SimCo: Beginning of the Year

  44. Hours used SimCo: End of the Year

  45. Hours used Percent of peak-period capacity. SimCo: End of the Year

  46. SimCo: Comparison of Results Fixed cost allocations are the same at the end and at the beginning because they are based on capacity instead of usage.

  47. SimCo: Comparison of Results Only budgeted variable and fixed servicedepartment costs were allocated to the two operating departments.The cost of service department inefficiencies,contained in the actual costs, should notbe passed along to operating departments.

  48. Quick Check:Allocating Costs by Behavior Foster City has an ambulance service that is used by the two public hospitals in the city. Variable ambulance costs are budgeted at $4.20 per mile. Fixed ambulance costs are budgeted at $120,000 per year. Data relating to the current year are:

  49. Quick Check  How much ambulance service cost will be allocated to Mercy Hospital at the beginning of the year? a. $117,000 b. $254,400 c. $114,480 d. $119,250

  50. Quick Check  How much ambulance service cost will be allocated to Mercy Hospital at the beginning of the year? a. $117,000 b. $254,400 c. $114,480 d. $119,250

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