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Copyright © 2006, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin
11th EditionChapter 15
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Copyright © 2006, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin
Service DepartmentCosting: An Activity
Approach
Chapter Fifteen
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Reasons for Allocating ServiceDepartment Costs
To encourage operatingdepartments to wisely
use service departmentresources.
To encourage operatingdepartments to wisely
use service departmentresources.
To provide operatingdepartments with more
complete cost datafor making decisions.
To provide operatingdepartments with more
complete cost datafor making decisions.
To help measure theprofitability of operating
departments.
To help measure theprofitability of operating
departments.
To create incentivefor service departments
to operate efficiently.
To create incentivefor service departments
to operate efficiently.
To value inventory for external financial
reporting purposes.
To value inventory for external financial
reporting purposes.
To include all overheadin the cost base when
costplus pricing is used.
To include all overheadin the cost base when
costplus pricing is used.
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Selecting Allocation Bases
OperatingDepartments
ServiceDepartments
$
$ 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 be
allocated based on hours spent in training employees ineach operating department.
$ 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 be
allocated based on hours spent in training employees ineach operating department.
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Examples of Allocation Bases
Service Department Allocation BasesLaunry !ouns of launry
Airport "roun Services #umer of flights
Cafeteria #umer of meals
%eical &acilities Cases hanle' numer of employees'
hours (or)e
%aterials *anling *ours of service' volume hanle
+nformation ,echnology #umer of personal computers'
applications installe
Custoial Services S-uare footage occupie
Cost Accounting Laor hours' customers serve
!o(er ./* use' capacity of machines*uman Resources #umer of employees' training hours
Receiving0 Shipping0 an Stores 1nits hanle' numer of re-uisitions'
space occupie
&actory Aministration ,otal laor hours
%aintenance %achine hours
Exh.
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+nterepartmental Services
!rolem
Allocating costs (hen service epartments
provie services to each other
!rolem
Allocating costs (hen service epartments
provie services to each other
Solutions
Direct %ethoStep %etho
Reciprocal %etho
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Direct %etho
&ervice'epartment(Cafeteria)
&ervice
'epartment(Custodial)
*perating'epartment(+achining)
*perating
'epartment($ssembly)
,nteractionsbetween servicedepartments areignored and all
costs areallocated directly
to operating
departments.
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Direct %etho Example
Service Departments Operating Departments
Cafeteria Custoial %achining Assemly
Departmental costs
efore allocation 2340444$ 540444$ 6440444$ 7440444$#umer of employees 89 84 4 24
S-uare feet occupie 90444 0444 90444 940444
Service Department Allocation Base
Cafeteria #umer of employees
Custoial S-uare feet occupie
Service Department Allocation Base
Cafeteria #umer of employees
Custoial S-uare feet occupie
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Direct %etho Example
Service Departments Operating Departments
Cafeteria Custoial %achining Assemly
Departmental costs
efore allocation 2340444$ 540444$ 6440444$ 7440444$
Cafeteria allocation ; ; ;
Custoial allocation ; ; ;
,otal after allocation ; ; ; ;
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Service Departments Operating Departments
Cafeteria Custoial %achining Assemly
Departmental costs
efore allocation 2340444$ 540444$ 6440444$ 7440444$
Cafeteria allocation 44 ? 24
@ $8660444
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Service Departments Operating Departments
Cafeteria Custoial %achining Assemly
Departmental costs
efore allocation 2340444$ 540444$ 6440444$ 7440444$
Cafeteria allocation 244 ? 24
@ $830444
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Service Departments Operating Departments
Cafeteria Custoial %achining Assemly
Departmental costs
efore allocation 2340444$ 540444$ 6440444$ 7440444$
Cafeteria allocation
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Service Departments Operating Departments
Cafeteria Custoial %achining Assemly
Departmental costs
efore allocation 2340444$ 540444$ 6440444$ 7440444$
Cafeteria allocation
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*perating'epartment(+achining)
*perating
'epartment($ssembly)
Step %etho
*nce a servicedepartment%s costs
are allocated#other service
department costsare not allocated
back to it.
&ervice'epartment(Cafeteria)
&ervice
'epartment(Custodial)
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Step %etho
,here are three )ey points to unerstanregaring the step metho:
,n 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.
$ny amount of the allocation base that is
attributable to a service department whose cost has already been allocated is ignored.
Each service department assigns its own costs to operating departments plus the costs that have
been allocated to it from other service departments.
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Step %etho Example
Service Departments Operating Departments
Cafeteria Custoial %achining AssemlyDepartmental costs
efore allocation 2340444$ 540444$ 6440444$ 7440444$
#umer of employees 89 84 4 24
S-uare feet occupie 90444 0444 90444 940444
Service Department Allocation Base
Cafeteria #umer of employees
Custoial S-uare feet occupie
/e (ill use the same ata use in the irect metho example
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Step %etho Example
Service Departments Operating Departments
Cafeteria Custoial %achining Assemly
Departmental costs
efore allocation 2340444$ 540444$ 6440444$ 7440444$
Cafeteria allocation ; ; ; ;
Custoial allocation ; ; ;
,otal after allocation ; ; ; ;
$llocate Cafeteria costs first sinceit provides more service than Custodial.
$llocate Cafeteria costs first sinceit provides more service than Custodial.
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Service Departments Operating Departments
Cafeteria Custoial %achining Assemly
Departmental costs
efore allocation 2340444$ 540444$ 6440444$ 7440444$
Cafeteria a llocation 8484 ? 4 ? 24
@ $340444
Allocation ase: #umer of employees
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Service Departments Operating Departments
Cafeteria Custoial %achining Assemly
Departmental costs
efore allocation 2340444$ 540444$ 6440444$ 7440444$
Cafeteria a llocation 484 ? 4 ? 24
@ $840444
Allocation ase: #umer of employees
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Service Departments Operating Departments
Cafeteria Custoial %achining Assemly
Departmental costs
efore allocation 2340444$ 540444$ 6440444$ 7440444$
Cafeteria a llocation 2484 ? 4 ? 24
@ $840444
Allocation ase: #umer of employees
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Service Departments Operating Departments
Cafeteria Custoial %achining Assemly
Departmental costs
efore allocation 2340444$ 540444$ 6440444$ 7440444$
Cafeteria a llocation
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Service Departments Operating Departments
Cafeteria Custoial %achining Assemly
Departmental costs
efore allocation 2340444$ 540444$ 6440444$ 7440444$
Cafeteria a llocation
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Step %etho Example
Service Departments Operating Departments
Cafeteria Custoial %achining Assemly
Departmental costs
efore allocation 2340444$ 540444$ 6440444$ 7440444$
Cafeteria a llocation
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Reciprocal %etho
,nterdepartmentalservices are given
full recognitionrather than partialrecognition as withthe step method.
&ervice'epartment(Cafeteria)
&ervice
'epartment(Custodial)
*perating'epartment(+achining)
*perating
'epartment($ssembly)
-ecause of its mathematical complexity#
the reciprocal method is rarely used.
Revenue !roucing
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Revenue !roucing Service Departments
,f a service departmentgenerates revenue# such as a
cafeteria that charges for the service itprovides# the revenue generated should
be offset against the costs incurred.*nly the remaining net amount
of costs should be allocated to other departments.
uic) Chec) Data
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uic) Chec) Datafor Direct an Step %ethos
Service Departments Operating Departments
AD%+# BACS Accounting Others
Departmental costs
efore allocation 840444$ 540444$ 8540444$ 5440444$
#umer of employees 89 9 4 4
#umer of !Cs 8 4 8 84
$llocation bases
-usiness school administration costs ($'+,/) /umber of employees
-usiness $dministration computer services
(-$C&) /umber of personal computers
,he irect metho of allocation is use
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uic) Chec)
0ow much cost will be allocated from $dministration to $ccounting
a. 2 34#
b. 2166#c. 217#
d. 2 89#
0ow much cost will be allocated from $dministration to $ccounting
a. 2 34#
b. 2166#c. 217#
d. 2 89#
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0ow much cost will be allocated from $dministration to $ccounting
a. 2 34#
b. 2166#c. 217#
d. 2 89#
0ow much cost will be allocated from $dministration to $ccounting
a. 2 34#
b. 2166#c. 217#
d. 2 89#
uic) Chec)
Service Departments Operating Departments
AD%+# BACS Accounting Others
Departmental costs
efore allocation 840444$ 540444$ 8540444$ 5440444$AD%+# allocation 4
4 ? 4
@ $230444
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uic) Chec)
0ow much total cost will be allocated from $'+,/ and -$C& combined to the $ccounting 'epartment
a. 2 58#5
b. 2135#
c. 289#
d. 2 6:#5
0ow much total cost will be allocated from $'+,/ and -$C& combined to the $ccounting 'epartment
a. 2 58#5
b. 2135#
c. 289#
d. 2 6:#5
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uic) Chec)
0ow much total cost will be allocated from $'+,/ and -$C& combined to the $ccounting 'epartment
a. 2 58#5
b. 2135#
c. 289#
d. 2 6:#5
0ow much total cost will be allocated from $'+,/ and -$C& combined to the $ccounting 'epartment
a. 2 58#5
b. 2135#
c. 289#
d. 2 6:#5
Service Departments Operating Departments
AD%+# BACS Accounting Others
Departmental costs
efore allocation 840444$ 540444$ 8540444$ 5440444$
AD%+# allocation
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uic) Chec) Data
Service Departments Operating Departments
AD%+# BACS Accounting Others
Departmental costs
efore allocation 840444$ 540444$ 8540444$ 5440444$
#umer of employees 89 9 4 4
#umer of !Cs 8 4 8 84
$llocation bases
-usiness school administration costs ($'+,/) /umber of employees
-usiness administration computer services
(-$C&) /umber of personal computers
,he step metho of allocation is use
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uic) Chec)
0ow much total cost will be allocated from $'+,/ and -$C& combined to the $ccounting 'epartment
a. 235#85b. 26:#98
c. 217#
d. 284#333
0ow much total cost will be allocated from $'+,/ and -$C& combined to the $ccounting 'epartment
a. 235#85b. 26:#98
c. 217#
d. 284#333
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0ow much total cost will be allocated from $'+,/ and -$C& combined to the $ccounting 'epartment
a. 235#85b. 26:#98
c. 217#
d. 284#333
0ow much total cost will be allocated from $'+,/ and -$C& combined to the $ccounting 'epartment
a. 235#85b. 26:#98
c. 217#
d. 284#333
uic) Chec)
Service Departments Operating Departments
AD%+# BACS Accounting Others
Departmental costs
efore allocation 840444$ 540444$ 8540444$ 5440444$
AD%+# allocation
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Allocating Costs y Behavior
;hen possible#variable and fixed
service department costsshould be allocated
separately.
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ariale serviceepartment costs shoul e
allocate to consuming epartmentsaccoring to the activitycausing incurrence
of the cost
Allocating Costs y Behavior
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$llocate fixed service department costs toconsuming departments in predeterminedlumpsum amounts that are based on the
consuming departments% peak or longrunaverage needs. Fixed cost allocations
$llocate fixed service department costs toconsuming departments in predeterminedlumpsum amounts that are based on the
consuming departments% peak or longrunaverage needs. Fixed cost allocations
$re based on amounts of capacity each consuming
department re
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Allocating Costs y Behavior
Bugete variale
an fixe service epartmentcosts shoul e allocate to
operating epartments
All i C B h i
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Allocating Costs y Behavior
+f variale cost allocations are mae at theeginning of the year0 the ugete variale
rate shoul e multiplie y the ugeteactivity level of each consuming epartment
+f variale cost allocations are mae at theeginning of the year0 the ugete variale
rate shoul e multiplie y the ugeteactivity level of each consuming epartment
$llocations made
at the beginning of theyear provide data for
pricing and other decisions.
All ti C t B h i
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Allocating Costs y Behavior
+f variale cost allocations are mae at theen of the year0 the ugete varialerate shoul e multiplie y the actual
activity level of each consuming epartment
+f variale cost allocations are mae at theen of the year0 the ugete varialerate shoul e multiplie y the actual
activity level of each consuming epartment
$llocations made atthe end of the year providedata for performance
evaluation.
Si C A E l
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&imCo has a maintenance department and two operatingdepartments cutting and assembly. =ariable maintenance
costs are budgeted at 2.4 per machine hour. Fixedmaintenance costs are budgeted at 28# per year.
'ata relating to the current year are
$llocate maintenance costs to the two operating departments.
!ercent of
!ea)!erio
Operating Capacity *ours *ours
Departments Re-uire !lanne 1se
Cutting 34F 790444 B40444 Assem$ly 64F 940444 640444
,otal hours 844F 8:90444 8:40444
SimCo: An Example
Si C B i i f th G
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Cutting Assemly
Department Department
ariale cost allocation: $434 > 790444 hours 690444$
$434 > 940444 hours 240444$
&ixe cost allocation:
,otal allocate cost
Cutting Assemly
Department Department
ariale cost allocation: $434 > 790444 hours 690444$
$434 > 940444 hours 240444$
&ixe cost allocation:
,otal allocate cost
0ours planned
SimCo: Beginning of the Gear
Si C B i i f th G
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Cutting Assemly
Department Department
ariale cost allocation: $434 > 790444 hours 690444$
$434 > 940444 hours 240444$
&ixe cost allocation:
34F of $440444 840444
64F of $440444 40444 ,otal allocate cost 8390444$ 8840444$
Cutting Assemly
Department Department
ariale cost allocation: $434 > 790444 hours 690444$
$434 > 940444 hours 240444$
&ixe cost allocation:
34F of $440444 840444
64F of $440444 40444 ,otal allocate cost 8390444$ 8840444$
>ercent of peakperiod capacity.
SimCo: Beginning of the Gear
0ours planned
Si C E f th G
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Cutting Assemly
Department Department
ariale cost allocation: $434 > 40444 hours 60444$
$434 > 640444 hours 60444$
&ixe cost allocation:
,otal allocate cost
Cutting Assemly
Department Department
ariale cost allocation:
$434 > 40444 hours 60444$
$434 > 640444 hours 60444$
&ixe cost allocation:
,otal allocate cost
0ours used
SimCo: En of the Gear
Si C E f th G
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Cutting Assemly
Department Department
ariale cost allocation: $434 > 40444 hours 60444$
$434 > 640444 hours 60444$
&ixe cost allocation:
34F of $440444 840444
64F of $440444 40444 ,otal allocate cost 830444$ 8460444$
Cutting Assemly
Department Department
ariale cost allocation:
$434 > 40444 hours 60444$
$434 > 640444 hours 60444$
&ixe cost allocation:
34F of $440444 840444
64F of $440444 40444 ,otal allocate cost 830444$ 8460444$
>ercent of peakperiod capacity.
SimCo: En of the Gear
0ours used
Si C C i f R lt
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Cost
,ype
Cutting Assemly Cutting Assemlyariale 690444$ 240444$ 60444$ 60444$
&ixe 840444 40444 840444 40444
8390444$ 8840444$ 830444$ 8460444$
Allocation Base on Allocation Base on
Beginningof!erio
!lanne Activity
Enof!erio
Actual Activity
&ixe cost allocations are the same at theen an at the eginning ecause they are
ase on capacity instea of usage
&ixe cost allocations are the same at theen an at the eginning ecause they are
ase on capacity instea of usage
SimCo: Comparison of Results
Si C C i f R lt
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SimCo: Comparison of Results
Only ugete variale an fixe serviceepartment costs (ere allocate to the
t(o operating epartments
,he cost of service epartment inefficiencies0containe in the actual costs0 shoul not
e passe along to operating epartments
uic) Chec):
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uic) Chec):Allocating Costs y Behavior
&oster City has an amulance service that is usey the t(o pulic hospitals in the city ariale
amulance costs are ugete at $64 per mile&ixe amulance costs are ugete at $840444
per year Data relating to the current year are:
!ercent of
!ea)!erio
Capacity %iles %iles
*ospitals Re-uire !lanne 1se%ercy 69F 890444 830444
#orthsie 99F 870444 870944
,otal 844F 20444 220944
ic) Chec)
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uic) Chec)
0ow much ambulance service cost will beallocated to +ercy 0ospital at the beginningof the year
a. 2119#b. 2856#6
c. 2116#67
d. 211:#85
0ow much ambulance service cost will beallocated to +ercy 0ospital at the beginning of the year
a. 2119#b. 2856#6
c. 2116#67
d. 211:#85
uic) Chec)
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0ow much ambulance service cost will beallocated to +ercy 0ospital at the beginningof the year
a. 2119#b. 2856#6
c. 2116#67
d. 211:#85
0ow much ambulance service cost will beallocated to +ercy 0ospital at the beginning of the year
a. 2119#b. 2856#6
c. 2116#67
d. 211:#85
uic) Chec)
%ercy #orthsie
ariale cost allocation:
$64 > 890444 miles 320444$
$64 > 870444 miles 780644$&ixe cost allocation
69F of $840444 960444
99F of $840444 330444
,otal allocate cost 8870444$ 8270644$
uic) Chec)
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uic) Chec)
0ow much ambulance service cost will be
allocated to +ercy 0ospital at the end of theyear
a. 2116#
b. 2117#7
c. 211#6
d. 2181#8
0ow much ambulance service cost will be
allocated to +ercy 0ospital at the end of theyear
a. 2116#
b. 2117#7
c. 211#6
d. 2181#8
uic) Chec)
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0ow much ambulance service cost will be
allocated to +ercy 0ospital at the end of theyear
a. 2116#
b. 2117#7
c. 211#6
d. 2181#8
0ow much ambulance service cost will be
allocated to +ercy 0ospital at the end of theyear
a. 2116#
b. 2117#7
c. 211#6
d. 2181#8
uic) Chec)
%ercy #orthsie
ariale cost allocation:
$64 > 830444 miles 37044$
$64 > 870944 miles 720944$
&ixe cost allocation
69F of $840444 960444 99F of $840444 330444
,otal allocate cost 88044$ 8250944$
Effect of Allocations on
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Effect of Allocations onOperating Departments
*nce service department costallocations are completed# they areincluded in operating departments%
*nce service department costallocations are completed# they areincluded in operating departments%
>erformanceevaluations
>erformanceevaluations
>rofitabilitydetermination
>rofitabilitydetermination
*verhead rate computations
*verhead rate computations
Effect of Allocations on
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&irst Stage AllocationsService epartment costs are
allocate to operating epartments&ervice'epartment(Cafeteria)
&ervice'epartment($ccounting)
&ervice'epartment(>ersonnel)
*perating'epartment(+achining)
*perating'epartment($ssembly)
The>roducts
Effect of Allocations onOperating Departments
Effect of Allocations on
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&ervice'epartment(Cafeteria)
&ervice'epartment($ccounting)
&ervice'epartment(>ersonnel)
*perating'epartment(+achining)
*perating'epartment($ssembly)
The>roducts
Secon Stage Allocations
Operating epartment overhea costs anallocate service epartment costs are
applie to proucts
Effect of Allocations onOperating Departments
Allocation !itfalls to Avoi
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!itfall 8
Allocating fixe costs using a variale
allocation ase
Allocation !itfalls to Avoi
Result
&ixe costsallocate to oneepartment are
heavily influence y
(hat happens in other epartments
.oly !roucts: An Example
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.oly !roucts: An Example
?olby >roducts has two sales territories#the Eastern Territory and the ;estern Territory.-oth sales territories are serviced by one auto
service center whose costs are all fixed. Contraryto good practice# ?olby allocates the fixed servicecenter costs to the sales territories on the basis
of actual miles driven (a variable base).
?olby >roducts has two sales territories#the Eastern Territory and the ;estern Territory.-oth sales territories are serviced by one auto
service center whose costs are all fixed. Contraryto good practice# ?olby allocates the fixed servicecenter costs to the sales territories on the basis
of actual miles driven (a variable base).
.oly !roucts: An Example
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.oly !roucts: An Example
Gear 8 Gear Auto service center costs
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y&irstHyear Allocations
/estern sales territory
809440444 miles I $446 per mile 340444$
Eastern sales territory
809440444 miles I $446 per mile 340444
,otal cost allocate 840444$
/estern sales territory
809440444 miles I $446 per mile 340444$
Eastern sales territory
809440444 miles I $446 per mile 340444
,otal cost allocate 840444$
The two sales territories share the servicecenter%s costs e
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ySeconHyear Allocation
/estern sales territory
809440444 miles I $449 per mile 790444$
Eastern sales territory
5440444 miles I $449 per mile 690444
,otal cost allocate 840444$
/estern sales territory
809440444 miles I $449 per mile 790444$
Eastern sales territory
5440444 miles I $449 per mile 690444
,otal cost allocate 840444$
;estern territory has the same number of miles aslast year# but 215# more cost allocated
because Eastern%s miles declined in year 8.
Allocation !itfalls to Avoi
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!itfall
1sing salesollars as an
allocation ase
Allocation !itfalls to Avoi
ResultSales of one epartment
influence the serviceepartment costs
allocate to other epartments
Clothier +nc H An Example
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Clothier +nc H An Example
Clothier ,nc.# a men%s clothing store has oneservice department and three sales departments#
&uits# &hoes# and $ccessories. &ervice department
costs total 24# for both years in the example.Contrary to good practice# Clothier allocates theservice department costs based on sales.
Clothier ,nc.# a men%s clothing store has oneservice department and three sales departments#
&uits# &hoes# and $ccessories. &ervice department
costs total 24# for both years in the example.Contrary to good practice# Clothier allocates theservice department costs based on sales.
Clothier +nc H &irstyear Allocation
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Clothier +nc H &irstyear Allocation
284# @ 26# 45A of 24#
,n the next year# the manager of the &uit 'epartmentincreased sales by 21#. &ales in the other departmentsare unchanged. Bet%s allocate the 24# service department
cost for the second year given the sales increase.
,n the next year# the manager of the &uit 'epartmentincreased sales by 21#. &ales in the other departmentsare unchanged. Bet%s allocate the 24# service department
cost for the second year given the sales increase.
Clothier +nc H Seconyear Allocation
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Clothier +nc H Seconyear Allocation
234# @ 25# 98A of 24#
,f you were the suit department manager# wouldyou be happy with the increased service department
costs allocated to your department
,f you were the suit department manager# wouldyou be happy with the increased service department
costs allocated to your department
En of Chapter 89
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En of Chapter 89