1. 1 PowerPointPresentation by PowerPoint Presentation by Gail B. Wright Professor Emeritus of Accounting Bryant University MANAGERIAL ACCOUNTING 10 TH EDITION BY MAHER, STICKNEY & WEIL ALLOCATING COSTS TO RESONSIBILITY CENTERS STUDENT CHAPTER 13 © Copyright 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South- Western are trademarks used herein under license.

2. Managerial Planning, Control, & Performance Evaluation 2 1.Explain the nature of indirect costs. 2.Explain why companies allocate indirect costs to departments & products. 3.Describe how to allocate service department costs to production departments. 4.Explain why ABC is used to allocate service department costs. LEARNING OBJECTIVES Continued

3. Managerial Planning, Control, & Performance Evaluation 3 5.Identify methods of allocating marketing & administrative costs to departments. 6.Explain how to allocate joint-process costs. 7.Explain why joint-process costs are allocated. LEARNING OBJECTIVES

4. Managerial Planning, Control, & Performance Evaluation 4 CHAPTER GOAL Chapter 13 discusses concepts & methods of assigning indirect costs such as overhead, to departments. Additionally, service department cost allocation & joint-process cost allocation are explained. ☼☼

5. Managerial Planning, Control, & Performance Evaluation 5 Why allocate indirect costs to products? Full product costs should be known, including allocated indirect costs, for pricing & planning decisions. LO 1 MANAGERS WANT TO KNOW!

6. Managerial Planning, Control, & Performance Evaluation 6 COST ALLOCATION The cost allocation process has 3 steps: 1)Assign direct costs to departments 2)Allocate indirect costs to departments 3)Allocate service department costs to production departments LO 3

7. Managerial Planning, Control, & Performance Evaluation 7 EXAMPLE: First Bank First Bank (FB) has 4 departments. Production departments are the Commercial Department & the Personal Department. Service departments are Computer Services & Processing. Indirect costs are allocated to each department. Service department costs are allocated to production departments in order to properly price their products. LO 3 Continued FBFB

8. Managerial Planning, Control, & Performance Evaluation 8 EXHIBIT 13.2 LO 3 Step 1: Distribute direct overhead costs. FBFB

9. Managerial Planning, Control, & Performance Evaluation 9 EXHIBIT 13.2 LO 3 Step 2: Allocate indirect overhead costs. FBFB

10. Managerial Planning, Control, & Performance Evaluation 10 ALLOCATION First Bank has 4 indirect costs: security, property taxes, rent & utilities & miscellaneous. When allocating indirect costs, First Bank must select a cost driver for each indirect cost, although miscellaneous costs may not have a cost driver. LO 3 FBFB

11. Managerial Planning, Control, & Performance Evaluation 11 How much indirect cost should be allocated to each department? LO 3 MANAGERS WANT TO KNOW!

12. Managerial Planning, Control, & Performance Evaluation 12 EXHIBIT 13.6 LO 3 Allocation of security costs to 4 departments. Cost driver: # of security visits.

13. Managerial Planning, Control, & Performance Evaluation 13 EXHIBIT 13.6 LO 3 Allocation of property tax costs to 4 departments. Cost driver: book value of assets.

14. Managerial Planning, Control, & Performance Evaluation 14 EXHIBIT 13.6 LO 3 Allocation of rent & utilities to 4 departments. Cost driver: floor space.

15. Managerial Planning, Control, & Performance Evaluation 15 EXHIBIT 13.2 LO 3 Step 3: Allocate service department costs to production departments.

16. Managerial Planning, Control, & Performance Evaluation 16 SERVICE DEPARTMENT ALLOCATIONS Under the direct method, service department costs are only allocated to production departments. Under the step method, service department costs are sequentially allocated to other service departments pro rata & finally to production departments. The reciprocal method employs matrix algebra to simultaneously allocate all department costs to each other. LO 3

17. Managerial Planning, Control, & Performance Evaluation 17 SERVICE DEPARTMENT COSTS: ABC When ABC is used, identification of more accurate cost-allocation cost drivers is possible. Using the Computer Services Department, ABC cost drivers would be hours of maintenance services & hours of technical support. LO 4

18. Managerial Planning, Control, & Performance Evaluation 18 MARKETING & ADMINISTRATIVE COSTS Allocating marketing & administrative costs & finding a basis for allocation are difficult. They are separate from overhead costs that are allocated to production departments. But allocation is important for pricing & planning decisions. LO 5

19. Managerial Planning, Control, & Performance Evaluation 19 JOINT PROCESS: Definition Simultaneously converts common input into several outputs. Example: timber logs are processed into lumber of various grades & sizes. LO 6

20. Managerial Planning, Control, & Performance Evaluation 20 EXAMPLE: Humbolt Company Humbolt Company (HC) processes logs into standard lumber & specialty lumber. Joint processing costs include materials, labor, & manufacturing overhead ($360,000). Humbolt must decide how to allocate the overhead to these 2 types of lumber. LO 6 HCHC

21. Managerial Planning, Control, & Performance Evaluation 21 SPLITOFF POINT: Definition Is the stage of processing when 2 products are separated. LO 6

22. Managerial Planning, Control, & Performance Evaluation 22 ALLOCATING JOINT COSTS Management has 2 methods of allocating joint costs:  Net realizable value (NRV) method  Physical quantities method LO 6

23. Managerial Planning, Control, & Performance Evaluation 23 The NRV method implies a matching of input costs with revenues generated by each output. LO 6

24. Managerial Planning, Control, & Performance Evaluation 24 The physical quantities method is used when output product prices are highly volatile or when significant processing occurs between splitoff & the 1 st point of marketability. LO 6

25. Managerial Planning, Control, & Performance Evaluation 25 ALLOCATING JOINT-PROCESS COSTS Organizations allocate joint costs for many reasons:  Measuring performance  Determining & responding to regulatory rate changes  Estimating casualty losses  Resolving contractual interests & obligations  Financial & tax reporting LO 7

26. Managerial Planning, Control, & Performance Evaluation 26 CHAPTER 13 THE END