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Support Department Cost Allocation Management Accounting: The Cornerstone for Business Decisions Copyright ©2006 by South-Western, a division of Thomson.

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Presentation on theme: "Support Department Cost Allocation Management Accounting: The Cornerstone for Business Decisions Copyright ©2006 by South-Western, a division of Thomson."— Presentation transcript:

1 Support Department Cost Allocation Management Accounting: The Cornerstone for Business Decisions Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.

2 Learning Objectives 1.Describe the difference between support departments and producing departments. 2.Calculate single and multiple charging rates for a support department. 3.Assign support department costs to producing departments using the direct, sequential, and reciprocal methods. 4.Calculate departmental overhead rates.

3 Match Definitions Producing Dept. Support Dept. Cost drivers that measure use or consumption of support services Costs that are directly traceable to a specific department Direct Costs Causal Factors Provides essential support services to producing departmts. Responsible for directly creating a product or service sold to a customer

4 What are the steps for determining product costs using predetermined overhead rates? 1.Departmentalize the firm 2.Classify each department as support or producing 3.Trace all costs in the firm to a support or producing department 4.Assign support department costs to producing departments using cost drivers that measure consumption of support department services 5.Calculate predetermined overhead rates for producing departments 6.Assign overhead costs to the units of individual products using the predetermined overhead rates

5 What are the objectives of assigning support department costs? 1.To obtain a mutually agreeable price 2.To compute product line profitability 3.To predict the economic effects of planning and control 4.To value inventory 5.To motivate managers.

6 How to calculate and use a single charging rate. Budgeted cost of Kuma & Buttons copying department: Fixed costs : $20,000 per year (machine rental & maintenance) Variable costs: $0.05 per page copied (paper and toner) Budgeted usage:Actual usage:Pages Audit120,000128,000 Compliance90,00082,000 Fraud90,00095,000 Total300,000307,

7 REQUIRED: Calculate a single charging rate and use this rate to assign the costs of the copying department to the user departments based on both budgeted and actual usage. Discuss the service usage performance of the producing departments. Calculation : Single charging rate: Total budgeted cost of the copying department: Fixed costs:$20,000 Variable costs (300,000 x $0.05) 15,000 Total$35,000 Budgeted single rate = $35,000 / 300,000 = per page How to calculate and use a single charging rate. 14-1

8 Assignment based on budgeted usage (budgeted service cost-needed as a performance benchmark and for product costing): The budgeted amount charged to the producing departments is calculated as follows: Number ofChargeTotal Pagesper PagesCharges Audit120,000$0.1167$14,004 Compliance90, ,503 Fraud 90, ,503 Total300,000$35,010 How to calculate and use a single charging rate. 14-1

9 Assignment based on actual usage (actual service costs – to be compared with the budgeted service costs). The actual amount charged to the producing department is calculated as follows: Number ofChargeTotal Pagesper PagesCharges Audit128,000$0.1167$14,938 Compliance92, ,736 Fraud 95, ,736 Total305,000$36,410 How to calculate and use a single charging rate. 14-1

10 Illustrate Allocation Relationships

11 How to calculate and assign service costs using multiple charging rates. Budgeted cost of Kuma & Buttons copying department: Fixed costs : $20,000 per year (machine rental & maintenance) Variable costs: $0.05 per page copied (paper and toner) EstimatedBudgeted:Actual: Peak UsageUsageUsage (Monthly) Pages:Pages:Pages: Audit9,200120,000128,000 Compliance25,00090,00082,000 Fraud7,80090,00095,000 Total42,000300,000307,

12 REQUIRED: Assign copying cost to the producing departments using variable and fixed rates based on both budgeted and actual usage Calculation: Fixed cost assignment (assigned in proportion to peak usage for both budgeted and actual usage cases): Peak #Proportion ofTotal FixedAmount Assigned of pagesPeak UsageCoststo Each Dept. Audit9, $15,000$3,285 Compliance25, ,0008,925 Fraud7, ,0002,790 Total42,000$15,000 Total cost assignment = Variable + Fixed How to calculate and assign service costs using multiple charging rates. 14-2

13 Budgeted usage (Budgeted costs for performance benchmark and product costing): Number ofNumber ofFixed CostTotal PagesPages X $0.04AssignmentCharges Audit120,000$4,800$3,285$8,085 Compliance90,0003,6008,92512,525 Fraud90,0003,6002,7906,390 Total300,000$12,000$15,000$27,000 How to calculate and assign service costs using multiple charging rates. 14-2

14 Actual usage (Actual costs for comparison with planned performance): Number ofNumber ofFixed CostTotal PagesPages X $0.04AssignmentCharges Audit128,000$5,120$3,285$8,405 Compliance82,0003,2808,92512,205 Fraud95,0003,8002,7906,590 Total307,000$12,200$15,000$27,200 How to calculate and assign service costs using multiple charging rates. 14-2

15 Define Direct Method of Cost Allocation

16 How to assign support department costs using the direct method. SupportDepts. Producing Depts PowerMaint.GrindingAssembly Direct Costs Variable$180,000$150,000$75,000$20,000 Fixed120,00080,00025,00040,000 Expected Activity Kilowatt hrs.0200,000700,000300,000 Mainten. hrs.1,00004,5004,500 Percent of Peak capacity required Maintenance75%25% Power65%35% 14-3

17 REQUIRED: Using the direct method, assign the support department costs to the producing departments using a single-rate approach and a dual-rate approach. For the dual-rate approach use peak capacity to assign fixed costs. Calculation: GrindingAssembly Power: 700,000 / (700, ,000) 70% 300,000 / (700, ,000)30% Maint.: 4,500 / (4, ,500)50% 4,500 / (4, ,500)50% How to assign support department costs using the direct method. 14-3

18 How to assign support department costs using the direct method. Using a single rate approach: 14-3 Support Dept.Producing Dept. PowerMainten.GrindingAssembly Direct costs $300,000 $230,000 $ 75,000 $ 20,000 Power (300,000) 210,000 90,000 Maintenance - (230,000) 115,000 Total $ - $400,000 $225,000

19 How to assign support department costs using the direct method. Using a dual-rate approach 14-3 Support Dept.Producing Dept. PowerMainten.GrindingAssembly Direct costs $ 300,000 $230,000 $ 75,000 $ 20,000 Var. cost. assign. Power (180,000) - 126,000 54,000 Maintenance - (150,000) 75,000 Fix. cost. assign. Power (120,000) - 90,000 30,000 Maintenance - (80,000) 52,000 28,000 Total $ - $418,000 $207,000

20 How to assign support department costs using the sequential method. SupportDepts. Producing Depts PowerMaint.GrindingAssembly Direct Costs Variable$180,000$150,000$75,000$20,000 Fixed120,00080,00025,00040,000 Expected Activity Kilowatt hrs.0200,000700,000300,000 Mainten. hrs.1,00004,5004,500 Percent of Peak capacity required Maintenance75%25% Power20%50%30% 14-4

21 REQUIRED: Using the sequential method, assign the support department costs to the producing departments using a single-rate approach and a dual-rate approach. For the dual-rate approach use peak capacity to assign fixed costs. Calculation:Maint.GrindingAssembly Power: 200,000 / (200, , ,000)16.67% 700,000 / (200, , ,000) 58.33% 300,000 / (200, , ,000)25.00% Maint.: 4,500 / (4, ,500)50% 4,500 / (4, ,500)50% How to assign support department costs using the sequential method. 14-4

22 How to assign support department costs using the sequential method. Using a single rate approach: 14-4 Support Dept.Producing Dept. PowerMainten.GrindingAssembly Direct costs $ 300,000 $230,000 $ 75,000 $ 20,000 Power (300,000) 50, ,990 75,000 Maintenance - (280,010) 140,005 Total $ - $389,995 $235,005

23 How to assign support department costs using the sequential method. Using a dual-rate approach 14-4 PowerMainten.GrindingAssembly Direct costs $300,000 $230,000 $ 75,000 $ 20,000 Var. cost. assign. Power (180,000) 30, ,994 45,000 Maintenance - (180,006) 90,003 Fix. cost. assign. Power (120,000) 24,000 60,000 36,000 Maintenance - (104,000) 67,600 36,400 Total $ - $397,597 $227,403

24 How to calculate and use departmental overhead rates. Summary of the single rate sequential cost assignment Producing Departments GrindingAssembly Direct costs$100,00060,000 Power cost assign.174,99075,000 Maint. Cost assign.140,005140,005 $414,995275,005 Machine hrs. (expected level)71,000 Assembly hrs. (expected level)107,500 One unit of Product Alpha uses 2 machine hours in the Grinding Department and 3 hours in the Assembly Department 14-4

25 REQUIRED: Calculate the departmental overhead rates using machine hours for grinding and assembly hours for assembly. Using the rates, determine the overhead costs assigned to one unit of product A. Calculation: Overhead rate (Grinding) = $414,995 / 71,000 = $5.845 per MH Overhead rate (Assembly) = $275,005 / 107,500 = $2.558 per Assembly hour Product A unit overhead cost = ($5.845 x 2) + ($2.558 x 3) = $ How to calculate and use departmental overhead rates. 14-4


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