1. Allocation of Support Activity Costs and Joint Costs
Chapter 17
Allocation of Support Activity Costs and Joint Costs

2. Learning Objective 1

3. Service Department Cost Allocation
First, we identify the factor that drives costs in the service department.
This cost driver is called the allocation base.
How are service department costs charged to production departments?

4. Service Department Cost Allocation
support
Service Departments
Production Departments
Provide support that facilitates the activities of production departments.
Carry out the central purposes of an organization.

5. Service Department Cost Allocation
How are service department costs charged to production departments?
Well, we measure the consumption of the allocation base in the production departments.

6. Service Department Cost Allocation
Third, we allocate the service department cost based on the relative amount of the allocation base consumed in each production department.
How are service department costs charged to production departments?

7. Service Department Cost Allocation
What happens to service department costs after they are allocated to production departments?
Allocated service department costs become a part of the manufacturing overhead in each production department.

8. Service Department Cost Allocation
I get it. They become a part of the overhead that is applied to products with a predetermined overhead rate.
Allocated service department costs become a part of the manufacturing overhead in each production department.

9. Service Department Cost Allocation
So, the costs become
a part of the finished
product via the
application of the pre-
determined factory
overhead rate.
Exactly. Take a look at this flow chart.
I think it will summarize our discussion of the allocation process.

10. Service Department Cost Allocation
First Stage Allocations
Service department costs are allocated to production departments.
Service Department
(Cafeteria)
Production Department
(Machining)
Service Department
(Accounting)
The Product
Production Department
(Assembly)
Service Department
(Personnel)
Second Stage Allocations
Production department overhead costs, plus allocated service department costs, are applied to products using departmental predetermined overhead rates.
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11. Selecting Allocation Bases
Typical Allocation Bases
Personnel:
Number of employees
Receiving:
Units handled
Security:
Square footage
Power:
Kilowatt hours
Cafeteria:
Custodial:
Accounting:
Staff hours

12. Selecting Allocation Bases
Criteria for selection
Personnel:
Number of employees
Custodial:
Square footage
Simplicity
Availability of space or equipment
Receiving:
Units handled
Cafeteria:
Number of employees
Benefits received by the production department
Security:
Square footage
Power:
Kilowatt hours
Accounting:
Staff hours

13. Interdepartmental Services
Service Department
(Cafeteria)
Production Department
(Machining)
POWER DEPARTMENT
Production Department
(Assembly)
Service Department
(Custodial)

14. Interdepartmental Services
Problem
Allocating costs when service departments provide services to each other
Solutions
Direct Method
Step Method

15. Direct Method For an example please see the textbook.
Service Department
(Cafeteria)
Production Department
(Machining)
Cost of services between service
departments are ignored and all
costs are allocated directly to production departments.
Service Department
(Custodial)
Production Department
(Assembly)
For an example please see the textbook.

16. Step Method Service Department (Cafeteria) Production Department
Service department costs are allocated to other service
departments and to production departments, usually starting with the service department that serves the largest number of other service departments.
Service Department
(Cafeteria)
Production Department
(Machining)
Service Department
(Custodial)
Production Department
(Assembly)

17. Step Method Service Department (Cafeteria) Production Department
(Machining)
Once a service department’s costs are allocated, other service departments’ costs are not allocated back to it.
Service Department
(Custodial)
Production Department
(Assembly)

18. Step Method For an example please see the textbook. Service Department
(Cafeteria)
Production Department
(Machining)
Custodial will have a new total to allocate to production departments: its own costs plus those costs allocated from the cafeteria.
Service Department
(Custodial)
Production Department
(Assembly)
For an example please see the textbook.

19. Learning Objective 2

20. Fixed Versus Variable Costs
Problem
Allocating common fixed costs using a variable activity allocation base
Result
When one department decreases activity to reduce allocations, all departments are penalized because the charge per use increases.
Remember, total fixed costs do not change as activity changes.

21. Fixed Versus Variable Costs
Problem
Allocating common fixed costs using a variable activity allocation base
Solution
Use dual allocation method, allocating fixed and variable costs separately.

22. Dual Cost Allocation Variable Costs Fixed Costs
Allocate budgeted amounts to operating departments in proportion to the long-run average usage of the allocation base.
Charge to production departments at a budgeted rate times actual short-run usage of the allocation base.
Budgeted costs should be allocated to avoid passing on inefficiencies from the service departments.
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23. Dual Cost Allocation Example
SimCo has a maintenance department and two production departments: cutting and assembly. Variable maintenance costs are budgeted at $0.60 per machine hour. Fixed maintenance costs are budgeted at $200,000 per year. Data relating to the current year are:
Allocate maintenance costs to the two operating departments.

24. Dual Cost Allocation Example
Variable costs are allocated based on hours used.
Fixed costs are allocated based long-run average usage.

25. A Behavioral Problem Problem Solution
Department managers may underestimate long-run average usage to reduce fixed cost allocations.
Solution
Reward managers for making accurate estimates of long-run average service department needs.

26. Learning Objective 3

27. The New Manufacturing Environment
More accurate cost tracing systems reduce the need for allocation of indirect costs.

28. The Rise of Activity-Based Costing
First stage allocations are to activities, not departments.
Service Department
(Cafeteria)
Activity One
Service Department
(Accounting)
The Product
Activity Two
Service Department
(Personnel)

29. Learning Objective 4

30. Joint Product Cost Allocation
Joint Product Costs
Product
Product

31. Joint Product Cost Allocation
Concept:
In some industries, a number of products are produced from a single raw material input.
Key terms:
Joint products – products resulting from a process with a common input.
Split-off point – the stage of processing where joint products are separated.
Joint product cost – costs of processing joint products prior to the split-off point.

32. Joint Product Cost Allocation
Consider the following example of an oil refinery.
We will assume only two products, gasoline and oil.

33. Joint Product Cost Allocation
Input
Production
Process
Split-Off
Point
Joint Product
Costs
Oil
Gasoline
Final
Sale
Separate
Processing
Separate Processing Costs
Separate Processing Costs

34. Learning Objective 5

35. Allocating Joint Costs
Physical-Units Method
Relative-Sales-Value Method
Net-Realizable-Value Method
Joint Product Costs

36. Allocating Joint Costs
Allocation based on a physical measure of the joint products at the split-off point.
Physical-Units Method
Allocation based on the relative values of the products at the split-off point.
Relative-Sales- Value Method
Allocation based on final sales values less separable processing costs.
Net-Realizable- Value Method

37. Allocating Joint Costs
Let’s look at an example illustrating the joint cost allocation methods.

38. Physical-Units Method
240,000 gallons
360,000 gallons
Joint
Production
Process
Split-Off
Point
Oil
Gasoline
Joint material
cost = $275,000
Joint conversion cost = $225,000

39. Physical-Units Method
$225,000 joint conversion cost plus $275,000 joint material cost

40. Relative-Sales-Value Method
$200,000
sales value at
split-off point
$600,000
Joint
Production
Process
Split-Off
Point
Oil
Gasoline
Joint material
cost = $275,000
Joint conversion cost = $225,000

41. Relative-Sales-Value Method
$225,000 joint conversion cost plus $275,000 joint material cost

42. Net-Realizable-Value Method
If products require further processing beyond the split-off point before they are marketable, it may be necessary to estimate the net realizable value (NRV) at the split-off point.
Estimated
NRV
Final
Sales
Value
Added Processing Costs – =

43. Net-Realizable-Value Method
Joint
Production
Process
Oil
Gasoline
Separate
Processing
Joint material
cost = $275,000
Joint conversion cost = $225,000
Sales
Value $500,000
Value $1,200,000
Split-Off
Point, Sales Value Unknown
Separate Processing Costs $500,000
Separate Processing Costs $200,000

44. Net-Realizable-Value Method
The relative sales value at the end of processing are $500,000 for oil, $1,200,000 for gas.
We subtract the additional processing costs from their relative sales value.
We then calculate the percentage of their respective net realizable values.
We then multiply the percentage times the joint costs that need to be allocated.

45. Relatively low value or quantity when compared to major products
By-Products
Joint
Input
Production
Process
Split-Off
Point
Costs
By-products
Major Product
Relatively low value or quantity when compared to major products

46. By-Products
Two commonly used methods of accounting for by-products are . . .
By-product NRV is deducted from cost of joint process before allocation.
By-product NRV is deducted from cost of main product. 1 2

47. Learning Objective 6

48. Reciprocal Services Method
Fully accounts for reciprocal services
More accurate
Can be combined with dual allocation

49. Weekly time available 52 hours
End of Chapter 17 17
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