1. Support Department Cost Allocation
CHAPTER

2. After studying this chapter, you should be able to:
Objectives
1. Describe the difference between support departments and producing departments.
2. Calculate single and multiple changing rates for a support department.
3. Allocate support-department costs to producing departments using the direct, sequential, and reciprocal methods.
4. Calculate departmental overhead rates.
After studying this chapter, you should be able to:

3. Types of Departments
Producing departments are directly responsible for creating the products or services sold to customers.

4. Maintenance, grounds, engineering, personnel, storage
Types of Departments
Supporting departments provide essential support services for producing departments.
Maintenance, grounds, engineering, personnel, storage

5. Steps in Allocating Support Department Costs to Producing Departments
1. Departmentalize the firm.
2. Classify each department as a support department or a producing department.
3. Trace all overhead costs in the firm to a support department or producing department.
4. Allocate supports department costs to the producing departments.
Continued

6. Steps in Allocating Support Department Costs to Producing Departments
5. Calculate predetermined overhead rates for the producing departments.
6. Allocate overhead costs to the units of individual products through the predetermined overhead rates.

7. Examples of Cost Drivers for Support Departments
Support Department Possible Driver
Accounting Number of transactions
Cafeteria Number of employees
Engineering Number of change orders
Maintenance Machine hours; maintenance hours
Payroll Number of employees
Personnel Number of employees, firings, layoffs, new hires

8. Objectives of Allocation
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.

9. Note Objective 5: Allocations can be used to motivate managers.

10. Hamilton Barry Fixed costs……………… $26,190
AND
Barry
Hamilton
Fixed costs……………… $26,190
Variable costs….. $0.023 per page

11. A Single Charge Rate Hamilton Barry
Estimated usage (in pages) by the three producing departments is as follows:
Audit Department 94,500
Tax Department 67,500
MAS Department 108,000
Total 270,000
Variable cost: 270,000 x $ $ 6,210
Fixed cost 26,190
Total cost for 270,000 pages $32,400
Barry
Hamilton
Average cost ($32,400 ÷ 270,000) $0.12 per page

12. Total Photocopying Department Charge
A Single Charge Rate
Total Photocopying Department Charge
Number of Pages
Charge per Page
Total Charges x =
Audit Department 92,000 $0.12 $11,040
Tax Department 65, ,800
MAS Department 115, ,800
Total 272,000 $32,640

13. Multiple Charging Rates
Amount Allocated to Each Department
Peak Number of Pages
Proportion of Peak Usage
Total Fixed Costs
Audit 7, $26,190 $ 5,238
Tax 22, ,190 14,928
MAS 9, , ,024
Total 39,375 $26,190

14. Multiple Charging Rates
Number of Pages x $0.023
Fixed Cost Allocation
Total Charges + =
Audit department $2,116 $ 5,238 $ 7,354
Tax department 1,495 14,928 16,423
MAS department 2, , ,669
Total $6,256 $26,190 $32,446

15. Budgeted Versus Actual Usage
When we allocate support-department costs to the producing departments, should we allocate actual or budgeted costs?

16. Budgeted Versus Actual Usage
Budgeted costs.

17. Budgeted Versus Actual Usage
A general principle of performance evaluation is that managers should not be held responsible for costs or activities over which they have no control.

18. Use of Budgeted Data for Product Costing
Number of Copies
Total Rate
Allocated Charges x =
Audit Department 94,500 $0.12 $11,340
Tax Department 67, ,100
MAS Department 108, ,960
Total 270,000 $32,400

19. Use of Actual Data for Performance Evaluation Purposes
Number of Copies
Total Rate
Allocated Charges x =
Audit department 92,000 $0.12 $11,040
Tax department 65, ,800
MAS department 115, ,800
Total 272,000 $32,640

20. Choosing A Service Department Cost Allocation Method
The three methods for allocating service department costs to producing departments are:
The Direct Method
The Sequential Method
The Reciprocal Method

21. Data for Illustrating Allocation Methods
Support Departments Producing Departments
Direct costs* $250,000 $160,000 $100,000 $ 60,000
Normal activity:
Kilowatt-hours , , ,000
Maintenance hours 1, ,500 4,500
*For a producing department, direct costs refer only to overhead costs that are directly traceable to the department.
Power Maintenance Grinding Assembly

22. Direct Method of Allocation
Power
Maintenance
Grinding
Assembly

23. Direct Method of Allocation
Power
Maintenance
Grinding
Assembly

24. STEP 1—CALCULATE ALLOCATION RATIOS
Grinding Assembly
Power =
600,000
(600, ,000)
0.75
200,000
(600, ,000)
0.25
Maintenance =
4,500
(4, ,500)
0.50
4,500
(4, ,500)
0.50
Direct Method

25. STEP 2—ALLOCATE SUPPORTS DEPARTMENT COSTS USING THE ALLOCATION RATIOS
Support Departments Producing Departments
Power Maintenance Grading Assembly
Direct costs $250,000 $160,000 $100,000 $ 60,000
Power -250, ,500 62,500
Maintenance , , ,000
$ $ $367,500 $202,500 a b a
0.75 x $250,000 = $187,500; 0.25 x $250,000 = $62,500
0.50 x $160,000 = $80,000 b
Direct Method

26. STEP 1: Rank service departments
Sequential Method of Allocation
STEP 1: Rank service departments
Power 1
Maintenance 2

27. Sequential Method of Allocation
STEP 2
Power
Maintenance
Grinding
Assembly

28. Sequential Method of Allocation
STEP 2
Maintenance
Grinding
Assembly

29. STEP 1—CALCULATE ALLOCATION RATIOS
Maint. Grinding Assembly
Power =
200,000
(200, , ,000)
0.20
600,000
(200, , ,000)
0.60
Sequential Method

30. STEP 1—CALCULATE ALLOCATION RATIOS
Maint. Grinding Assembly
Mainte- nance
4,500
(4, ,500)
0.50 =
4,500
(4, ,500)
0.50
Sequential Method

31. STEP 2—ALLOCATE SUPPORT DEPARTMENT COSTS USING THE ALLOCATION RATIOS
Support Departments Producing Departments
Power Maintenance Grading Assembly
Direct costs $250,000 $160,000 $100,000 $ 60,000
Power -250,000 50, ,000 50,000
Maintenance , , ,000
$ $ $355,000 $215,000 a b a
0.20 x $250,000 = $50,000; 0.60 x $250,000 = $150,000;
0.20 x $250,000 = $50,000
0.50 x $210,000 = $105,000 b
Sequential Method

32. Reciprocal Method
The reciprocal method of allocation recognizes all interactions among support departments.

33. Reciprocal Method Support Departments Producing Departments
Power Maintenance Grading Assembly
Direct costs:
Normal activity:
Kilowatt-hours , , ,000
Maintenance
hours 1, ,500 4,500
Proportion of Output Used by Departments
Power Maintenance Grading Assembly
Allocated ratios:
Power
Maintenance

34. Reciprocal Method M = Direct costs + Share of Power’s costs
M = $160,000 + $50, M
0.98M = $210,000
M = $214,286

35. Reciprocal Method P = Direct cost + Share of Maintenance’s cost
= $250, ($214,286) P =
$250,000 + $21,429 P =
$271,429 P

36. ALLOCATE SUPPORT DEPARTMENT COSTS USING THE ALLOCATION RATIOS AND THE SUPPORT-DEPARTMENT COSTS FROM RECIPROCAL METHODS EQUATIONS
Support Departments Producing Departments
Power Maintenance Grading Assembly
Direct costs $250,000 $160,000 $100,000 $ 60,000
Power -271,429 54, ,857 54,286
Maintenance , , , ,429
Total $ $ $359,286 $210,715
from Slide 7-35
from Slide 7-34

37. Comparison of Support Department Cost Allocations Using the Direct, Sequential, and Reciprocal Methods
Direct Method
Grinding Assembly
Direct costs $100,000 $ 60,000
Allocated from power 187,500 62,500
Allocated from maintenance 80, ,000
Total cost $367,500 $202,500
Click on button to compare with sequential method
Return to show
Click on button to compare with reciprocal method

38. Comparison of Support Department Cost Allocations Using the Direct, Sequential, and Reciprocal Methods
Sequential Method
Grinding Assembly
Direct costs $100,000 $ 60,000
Allocated from power 150,000 50,000
Allocated from maintenance 105, ,000
Total cost $355,000 $215,000
Click on button to compare with direct method
Return to show
Click on button to compare with reciprocal method

39. Comparison of Support Department Cost Allocations Using the Direct, Sequential, and Reciprocal Methods
Reciprocal Method
Grinding Assembly
Direct costs $100,000 $ 60,000
Allocated from power 162,857 54,286
Allocated from maintenance , ,429
Total cost $359,286 $210,715
Click on button to compare with direct method
Return to show
Click on button to compare with sequential method

40. Departmental Overhead Rates
The overhead rate for the grinding department is computed as follows (assuming the normal level of activity is 71,000 MH):
OH rate = $355,000  71,000 = $5 per MH
The overhead rate for the assembly department is computed as follows (assuming the normal level of activity is 107,500 DLH):
OH rate = $215,000  107,500 = $2 per DLH

41. Product Unit Cost
A product requires two machine hours of grinding per unit and one hour of assembly.
Overhead cost assigned:
2 x $5 $10
1 x $
Total assigned $12

42. Chapter Seven
The End