Managerial Accounting: An Introduction To Concepts, Methods, And Uses Chapter 13 Allocating Costs to Responsibility Centers Maher, Stickney and Weil

Learning Objectives (Slide 1 of 2) Explain what comprises common (or indirect) costs. Explain why companies allocate common costs to departments and products. Describe how to allocate service department costs to production departments. Explain why activity-based costing is used to allocate service department costs.

Learning Objectives (Slide 2 of 2) Identify methods of allocating marketing and administrative costs to departments. Explain how to allocate joint-process costs. Explain why joint-process costs are allocated.

Define Common Costs

Define Service Departments

What is the goal of cost allocation? Cost allocation is a three step process: List the three steps.

Draw the Overhead Distribution and Allocation

Allocating Service Department Costs Allocating service department costs to production departments can be accomplished by several methods For example, the step method allocates costs in steps as follows: Begin with the service dept that receives the smallest amount of services from other service depts.

Allocating Service Department Costs Allocate its costs to other service and production departments Distribute the total costs of the service dept receiving the next smallest amount of service from other depts. and so on until all service dept costs have been allocated to production depts.

Activity-Based Costing A more accurate approach to allocate service dept costs might use ABC principles This approach involves: Measuring each service dept’s resource spending by unit, batch, product, customer, and facility

Activity-Based Costing Identify and measure activities demanded by other depts. that require support service Identify appropriate cost drivers and calculate cost-driver rates Allocate service dept costs based on other departments’ usage of cost-driver bases

Marketing and Administrative Expenses Management will often allocate marketing and administrative costs to departments Bases for allocating such costs might include the following: Cost Basis Storage Costs Floor Space Handling Costs Tonnage Handled Delivery Expenses Number of Miles Operated

Define a Joint-Process Cost

Joint-Process Costs Joint-process costs must be allocated to joint products to provide managers with product cost information for decision making & performance evaluation

What are the two major methods of allocating joint costs?

Explain Net Realizable Method

Explain the Physical Quantities Method

Why Allocate Joint-Process Costs?

Dr. Michael Blue, CFE, CPA, CMA blue@bloomu.edu If you have any comments or suggestions concerning this PowerPoint Presentation for Managerial Accounting, An Introduction To Concepts, Methods, And Uses, please contact: Dr. Michael Blue, CFE, CPA, CMA blue@bloomu.edu Bloomsburg University of Pennsylvania