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Allocations. Operating. Departments. Carry out the central purposes.
Chapter 11B Service Department Costing
The Need for Cost Allocations Operating Departments
Service Departments
Carry out the central purposes of an organization
Provide support to the operating departments
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The Need for Cost Allocations Service Department (Cafeteria)
Service Department (Accounting) Service Department (Personnel) McGraw-Hill/Irwin
First Stage Allocations Service department costs are allocated to operating departments.
Operating Department (Machining)
The Products
Operating Department (Assembly)
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The Need for Cost Allocations Service Department (Cafeteria)
Service Department (Accounting) Service Department (Personnel) McGraw-Hill/Irwin
Second Stage Allocations Operating department overhead costs and allocated service department costs are applied to products.
Operating Department (Machining)
The Products
Operating Department (Assembly)
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Power Plant circa 1900.
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The various distribution systems that exist throughout campus include:
Tunnel System * = 36,000 feet Ricwel System ** = 8,000 feet Chilled Water Distribution = 56,000 feet Domestic Water Distribution = 128,000 feet Electrical Distribution = 136,000 feet Storm Sewers = 115,000 feet Sanitary Sewers = 89,000 feet
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Allocating Fixed Costs My performance looked good until they allocated those service department costs, so I’m not going to use the service again.
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But that would not be beneficial to the company; most of those costs are fixed. What if we charged a flat annual fee for the service?
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Allocating Fixed Costs That sounds better. If the fee is fixed, the more I use the service the lower my average cost per use will be.
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Allocating Costs by Behavior Variable Costs
Fixed Costs
Charge to operating departments at a budgeted rate times the usage of the allocation base.
Allocate budgeted amounts to operating departments in proportion to the peak-period capacity required by the operating department.
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Allocating Costs by Behavior Variable Costs
Fixed Costs
Allocate Charge to budgeted amounts operating to operating departments departments at a in proportion to the budgeted rate times peak-period capacity the usage of the required by the Budgetedbase. costs should be operating allocateddepartment. allocation
to avoid passing on inefficiencies from the service departments.
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Allocating Costs by Behavior Allocations are made at the beginning of the period to provide data for predetermined overhead rates and flexible budgets. Allocations are made at the end of the period to provide data for comparing actual performance to planned performance.
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Allocating Costs by Behavior Example SimCo has a maintenance department and two operating 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. McGraw-Hill/Irwin
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Allocating Costs by Behavior Example: Beginning of the Period Hours planned Cutting Department Variable cost allocation: $0.60 × 75,000 hours $0.60 × 50,000 hours Fixed cost allocation
$
Assembly Department
45,000 $
30,000
Total allocated cost
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Allocating Costs by Behavior Example: Beginning of the Period
Cutting Department Variable cost allocation: $0.60 × 75,000 hours $0.60 × 50,000 hours Fixed cost allocation 60% of $200,000 40% of $200,000 Total allocated cost
$
Assembly Department
45,000 $
30,000
$
80,000 110,000
120,000 $
165,000
Percent of peak-period capacity. McGraw-Hill/Irwin
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Allocating Costs by Behavior Example: End of the Period Hours used
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Allocating Costs by Behavior Example: End of the Period
Percent of peak-period capacity. McGraw-Hill/Irwin
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Allocating Costs by Behavior Example
Fixed cost allocations are the same at the end and at the beginning because they are based on capacity instead of usage. McGraw-Hill/Irwin
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Quick Check Data Foster City has an ambulance service that is used by the two public hospitals in the city. Variable ambulance costs are budgeted at $4.20 per mile. Fixed ambulance costs are budgeted at $120,000 per year. Data relating to the current year are:
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Quick Check How much ambulance service cost will be allocated to Mercy Hospital at the beginning of the year? a. $117,000 b. $254,400 c. $114,480 d. $119,250
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Quick Check How much ambulance service cost will be allocated to Mercy Hospital at the beginning of the year? a. $117,000 b. $254,400 c. $114,480 d. $119,250
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Quick Check How much ambulance service cost will be allocated to Mercy Hospital at the end of the year? a. $114,000 b. $118,800 c. $110,400 d. $121,200
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Quick Check How much ambulance service cost will be allocated to Mercy Hospital at the end of the year? a. $114,000 b. $118,800 c. $110,400 d. $121,200
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Allocation Pitfalls to Avoid Pitfall 1 Using sales dollars as an allocation base
Result Departments that increase revenues are penalized by receiving more allocated costs.
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Allocation Pitfalls to Avoid Pitfall 2 Allocating fixed costs using a variable activity allocation base
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Result Total fixed costs do not change, but departments that increase activities to support increased revenues are penalized by receiving more allocated costs.
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End of Chapter 15
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