Name : Nabila Ika Sari

ID Class : 008201900007
Summary Managerial Accounting

Support-Department Cost Allocation

An Overview of Cost Allocation

Mutually beneficial costs, which occur when the same resource is used in the output o
f two or more services or products, are common costs.
Types of Departments
 Producing departments are directly responsible for creating the products or services sold
to customers. In the opening scenario’s public accounting firm, examples of producing d
epartments are auditing, tax, and management advisory services. In a manufacturing setti
ng, producing departments are those that work directly on the products being manufactur
ed .
 Support departments provide essential support services for producing departments. These
departments are indirectly connected with an organization’s services or products. Note th
at this involves tracing costs to the departments, not allocating costs, because the costs ar
e directly associated with the individual department.
Step in Allocating Suport 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.
5. Calculate predetermined overhead rates for the producing departments.
6. Allocate overhead costs to the units of individual products through the predetermined ov
erhead rates.
Example of Cost Drivers for Support Department
Support Department Possible Driver
Accounting Number of transaction
Cafeteria Number of employees
Engineering Number of change orders
Maintanance Machine hours, maintenance hours
Payroll Number of employees
Personnel Number of employees, firings, layoffs, new hires
Objectives of Allocation
A number of important objectives are associated with the allocation of support department co
sts to producing departments and ultimately to specific products. The following major objecti
ves have been identified by the IMA:
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
Allocating One Department’s Costs to Another Department
Frequently, the costs of a support department are allocated to other departments through the u
se of a charging rate. In this case, we focus on the allocation of one department’s costs to othe
r departments. For example, a company’s Data-Processing Department may serve various oth
er departments. The cost of operating the Data Processing Department is then allocated to the
user departments.
A Single Charging Rate
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 costs of (270,000 $0.023) $6,210

Fixed costs of $26,190
Total costs for 270,000 pages $32,400
Average cost (32,400 ÷ 270,000) $0.12 per page
The total Photocopying Department charges
Number of Pages × Charge per page = Total Charges
Audit 92,000 $0.12 $ 11,040
Tax 65,000 0.12 7,800
MAS 115,000 0.12 13,800
Total 272,000 $32,640

Multiple Charging Rates

Peak Number Proportion Total Amount Allocated
of Pages of Peak Usage Fixed Costs to Each Department
 Audit 7,875 0.20 $26,190 $5,238
Tax 22,500 0.57 26,190 14,928
MAS 9,000 0.23 26,190 6,024
Total 39,375 $26,190

Number of Fixed Cost

Pages × $0.023 + Allocation = Total Charges
Audit department $2,116 $5,238 $7,354
Tax department 1,495 14,928 16,423
MAS department 2,645 6,024 8,669
Total $6,256 $26,190 $32,446

Budgeted versus Actual Usage

A general principle of performance evaluation is that managers should not beheld responsible
for costs or activities over which they have no control.
Use of Budgeted Data for Product Costing
Number of Pages × Charge per page = Total Charges
Audit 94,500 $0.12 $ 11,340
Tax 67,500 0.12 8,100
MAS 108,000 0.12 12,960
Total 270,000 $32,400

Use of Actual Data for Performance Evaluation Purpose

Number of Pages × Charge per page = Total Charges
Audit 92,000 $0.12 $ 11,040
Tax 65,000 0.12 7,800
MAS 115,000 0.12 13,800
Total 272,000 $32,640

Choosing a Support-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
Sequential Method of Allocation
Step 1—Calculate Allocation Ratios
Grinding Assembly
Power 600,000 0.75 -
(600,000+200,000)
 200,000 - 0.25
(600,000+200,000)
Maintenanc 4,500 0.50 -
e (4,500+4,500)
4,500 - 0.50
(4,500+4,500)

Step 2—Allocate Support-Department Costs Using the Allocation Ratios

Support Department Producing Department
Power Maintenance Grinding Assembly
Direct cost $250,000 $160,000 $100,000 $60,000
Powera (250,000) 50,000 150,000 50,000
Maintenanceb - (210,000) 105,000 105,000
$ 0 $ 0 $335,000 $215,000
a
0.75 × $250,000 = $187,000 ; 0.25 × $250,000 = $62,500
b
0.50 × 160,000 = $80,000

Reciprocal Method of Allocation

Support Department Producing Department
Power Maintenance Grinding Assembly
Direct cost :
Normal Activity:
Kilowatt hours - 200,000 600,000 200,000
Maintenance hour 1,000 - 4,500 4,500
s
Propotion of Output Used by Department
Power Maintenance Grinding Assembly
Allocated ratio:
Power - 0.20 0.60 0.20
Maintenance 0.10 - 0.45 0.45

M = Direct costs + Share of Power’s costs P =Direct costs + Share of Maintenan

ce’s costs

= $160,000 + $50,000 + 0.02M = $250,000 + 0.1($214,286)

0.98M = $210,000 = $250,000 + $21,429

M = $214,286 P = $271,429

Comparison of the Three Methods

Departmental Overhead Rate

The overhead rate for the Grinding Department is computed as follows (assuming the normal
level of activity is 71,000 MH)
Overhead rate = $355,000/71,000 machine hours $5 per MH

The overhead rate for the Grinding Department is computed as follows (assuming the normal
level of activity is 107,500 DLH)
Overhead rate = $215,000/107,500 direct labor hours $2 per DLH
Product Unit Cost
A product requires two machine hours of grinding per unit and one hour of assembly.
Overhead cost assigned :
2×$5 $10 Total assigned $12
1×$2 $2