allocating costs of support departments & joint products
TRANSCRIPT
COST MANAGEMENT
COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning.Cengage Learning and South-Western are trademarks used herein under license.
1
Accounting & ControlHansen▪Mowen▪Guan
Chapter 7Allocating Costs of
Support Departments and Joint Products
2
Study Objectives1. Describe the difference between support departments
and producing departments.
2. Calculate charging rates, and distinguish between single and dual charging rates.
3. Allocate support center costs to producing departments using the direct method, the sequential method, and the reciprocal method.
4. Calculate departmental overhead rates.
5. Identify the characteristics of the joint production process, and allocate joint costs to products.
3
An Overview of Cost Allocation
• Allocation is dividing a pool of costs and assigning those costs to subunits
• The cost objects must be determined• Cost objects are usually departments
– Producing: creating products sold to customers
– Support: provide essential services for producing departments
4
Departmentalization:Manufacturing Firm
5
Departmentalization:Service Firm
6
Allocating Support Department Costs to Producing Departments
• Departmentalize the firm• Classify each department as support or producing• Trace all overhead costs in the firm to the appropriate
department• Allocate support department costs to producing
departments• Calculate predetermined overhead rate for producing
departments• Allocate overhead to units produced
Steps:
7
An Overview of Cost Allocation
8
Allocating One Department’s Costs to Another Department
• The costs of a support department are often allocated through the use of a charging rate.
• Major factors of rate selection:– Choice of single or dual rate– Use of budgeted or actual support department
costs.
9
Allocating One Department’s Costs to Another Department
• Developing a fixed rate– Determine budgeted fixed costs– Compute allocation ratio– Allocate
• Developing the variable rate– Depends on the costs that change as the activity
driver changes
Fixed costs + estimated variable costsSingle =rate estimated usage
Dual rate: Fixed rate and a variable rate
10
Allocating One Department’s Costs to Another Department
When allocating support department costs, should actual or budgeted costs be allocated?
Answer: Budgeted – to prevent the transfer of efficiencies or inefficiencies from one department to another.
11
Allocating One Department’s Costs to Another Department
12
Allocating One Department’s Costs to Another Department
13
Choosing a Support Department Cost Allocation Method
• Direct method– Costs are allocated only to producing
departments• Sequential (step) method
– Costs allocations are performed in a step-down fashion, using predetermined ranking procedures (e.g., degree of support)
• Reciprocal method– Recognizes interactions of support
departments prior to allocation to producing departments
14
Choosing a Support Department Cost Allocation Method
15
Direct allocation
600,000 $250,000 = $187,500
600,000 + 200,000
200,000 $250,000 = $62,500
600,000 + 200,000
4,500 $160,000 = $80,000
4,500 + 4,500
4,500 $160,000 = $80,000
4,500 + 4,500
Allocate Power Dept costs based on kilowatt-hours:
Grinding
Assembly
Grinding
Assembly
Allocate Maintenance Dept costs based on maintenance-hours:
16
Direct allocation
17
Sequential allocation
• Rank support departments by their direct costs• Allocate
– First support department’s direct cost to all other support departments and producing departments
– Next support department’s costs (direct + previously allocated) to subsequent support and producing
– Etc.• Once a support department’s costs are allocated
it never receives a subsequent allocation
18
Sequential allocation
200,000 Maint kWh $250,000 = $50,000
200,000 600,000 200,000+ +Maint kWh Grinding kWh Assembly kWh
Step 1: Allocate Power Dept costs based on kilowatt-hours:
To Maintenance
600,000 Grinding kWh $250,000 = $150,000
200,000 600,000 200,000+ +Maint kWh Grinding kWh Assembly kWh
200,000 Assembly kWh $250,000 = $50,000
200,000 600,000 200,000+ +Maint kWh Grinding kWh Assembly kWh
To Grinding
To Assembly
19
Sequential allocationStep 2: Allocate Maintenance Dept costs (direct + allocated) based on maintenance-hours:
4,500 Grinding $210,000 = $105,000
4,500 4,500+Grinding Assembly
To Grinding
Costs to allocate: $160,000 direct + $50,000 allocated = $210,000
To Assembly 4,500 Assembly $210,000 = $105,000
4,500 4,500+Grinding Assembly
20
Sequential allocation
21
Reciprocal allocation
22
Reciprocal allocation
M = $160,000 + .2PM = $160,000 + .2(250,000 + .1M)M = $160,000 + 50,000 + .02M
.09M = $210,000M = $214,286
Utilize a series of simultaneous linear equations
P = $250,000 + .1PP = $250,000 + .1(214,286)P = $250,000 + 21,429P = $271,429
23
Reciprocal allocation
M = $160,000 + .2PM = $160,000 + .2(250,000 + .1M)M = $160,000 + 50,000 + .02M
.98M = $210,000M = $214,286
Utilize a series of simultaneous linear equations
P = $250,000 + .1PP = $250,000 + .1(214,286)P = $250,000 + 21,429P = $271,429
24
Reciprocal allocation
M = $160,000 + .2PM = $160,000 + .2(250,000 + .1M)M = $160,000 + 50,000 + .02M
.98M = $210,000M = $214,286
Utilize a series of simultaneous linear equations
P = $250,000 + .1PP = $250,000 + .1(214,286)P = $250,000 + 21,429P = $271,429
25
Reciprocal allocation
26
Choosing a Support Department Cost Allocation Method
27
Departmental Overhead Ratesand Product Costing
After allocating all support service costs to producing departments, an overhead rate is calculated for each department
Allocated Producingservice departmentcosts overhead costs
Measure of activity
28
Departmental Overhead Ratesand Product Costing
A product cost can now be determined:
Direct materials+ Direct labor+ Assigned overhead
Product cost
29
Accounting for JointProduction Processes
• Joint products are two or more products produced simultaneously by the same process up to a “split-off” point.– The split-off point is the point at which the
joint products become separate and identifiable.
• Separable costs are easily traced to individual products and offer no particular problem.
30
Accounting for JointProduction Processes
31
Accounting for JointProduction Processes
32
Accounting for JointProduction Processes
• The distinction between joint and by-products rests solely on the relative importance of their sales value.
• A by-product is a secondary product recovered in the course of manufacturing a primary product.– Joint costs are not typically allocated– Sales revenue is classified as “other income”– Post-split-off processing costs are deducted
from sales revenue
33
Joint Cost Allocation Methods
• Physical Units Method– Presumes that each unit of the final product
costs as much to produce as any other• Weighted Average Method
– Applies weight factors to reflect differing materials, complexity, time, etc.
34
A sawmill processes logs into four grades of lumber and incurs total joint costs of $186,000:
Joint Cost Allocation:Physical Units Method
Grades Board FeetPercentof Units
Joint CostAllocation
First and second 450,000 15.00% 27,900$ No. 1 common 1,200,000 40.00% 74,400 No. 2 common 600,000 20.00% 37,200 No. 3 common 750,000 25.00% 46,500
3,000,000 186,000$
35
A peach canning factory purchases $5,000 of peaches and grades and cans them by quality.
Joint Cost Allocation:Weighted Average Method
GradesNumberof Cases
WeightFactor
Weighted Numberof Cases Percent
Joint Cost
AllocationFancy 100 1.30 130 21.67% 1,083$ Choice 120 1.10 132 22.00% 1,100 Standard 303 1.00 303 50.50% 2,525 Pie 70 0.50 35 5.83% 292
600 5,000$
36
Joint Cost Allocation Methods
• Sales-Value-at-Split-Off-Method– Allocates joint cost based on each product’s
proportionate share of sales value at split-off• Net Realizable Value Method
– Allocates joint cost based on hypothetical market price (eventual market value minus processing costs beyond split-off)
• Constant Gross Margin Percentage Method– Allocates joint costs such that the gross margin is the
same for each product
37
A sawmill processes logs into four grades of lumber and incurs total joint costs of $186,000:
Joint Cost Allocation:Sales-Value-at-Split-Off Method
Grades Board Feet
Price at Split-Off
(per 1,000board ft.)
Sales Value at Split-Off Percent
Joint CostAllocation
First and second 450,000 300$ 135,000 26.99% 50,201$ No. 1 common 1,200,000 200 240,000 47.99% 89,261 No. 2 common 600,000 121 72,600 14.52% 27,007 No. 3 common 750,000 70 52,500 10.50% 19,530
3,000,000 500,100 185,999$ does not sum to $186,000 due to rounding
38
Joint Cost Allocation:Net Realizable Value Method
A company manufactures two products, Alpha and Beta, from a joint process. One production run costs $5,750 and results in 1,000 gallons of Alpha and 3,000 gallons of Beta. The separable cost for Alpha is $1 per gallon and for Beta is $2 per gallon.
Market Price
Further Processing
CostHypothetical Market Price
Number of Units
Hypothetical Market Value Percent
Allocated Joint Cost
Alpha $5 $1 $4 1,000 4,000$ 40.0% 2,300$ Beta 4 2 2 3,000 6,000 60.0% 3,450
10,000$ 5,750$
39
Joint Cost Allocation:Constant Gross Margin Method
Revenue:Alpha ($5 × 1,000) 5,000$ Beta ($4 × 3,000) 12,000 17,000$ 100%
CostsAlpha ($1 × 1,000) 1,000$ Beta ($2 × 3,000) 6,000 Joint costs 5,750 12,750 75%
Gross Margin 4,250$ 25%
Determine gross margin percentage
Alpha BetaEventual market value 5,000$ 12,000$ Less: Gross margin at 25% (1,250) (3,000)
Cost of goods sold 3,750$ 9,000$ Less: seperable costs (1,000) (6,000)
Allocated joint costs 2,750$ 3,000$
Joint cost allocation
COST MANAGEMENT
COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning.Cengage Learning and South-Western are trademarks used herein under license.
40
Accounting & ControlHansen▪Mowen▪Guan
End Chapter 7