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McGraw-Hill/Irwin
Learning Objective 1
McGraw-Hill/Irwin
support
Production Departments
Third, we allocate the service department cost based on the relative amount of the allocation base consumed in each production department.
Service Department Production department overhead costs, plus allocated service (Personnel) department costs, are applied to products using
departmental predetermined overhead rates.
Simplicity
Accounting:
Staff hours
Interdepartmental Services
Service Department (Cafeteria) Production Department (Machining)
POWER DEPARTMENT
Interdepartmental Services
Problem Allocating costs when service departments provide services to each other
Solutions
Direct Method
Step Method
Direct Method
Cost of services between service departments are ignored and all costs are allocated directly to production departments.
20 $360,000 = $144,000 20 + 30
30 $360,000 = $216,000 20 + 30
Allocation base: Number of employees
= $30,000
= $60,000
Step Method
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.
Step Method
Once a service departments costs are allocated, other service departments costs are not allocated back to it.
Step Method
Custodial will have a new total to allocate to production departments: its own costs plus those costs allocated from the cafeteria.
10 $360,000 10 + 20 + 30
= $60,000
20 $360,000 10 + 20 + 30
= $120,000
30 $360,000 10 + 20 + 30
= $180,000
New total = $90,000 original custodial cost plus $60,000 allocated from the cafeteria.
= $50,000
= $100,000
Comparison of Methods
Totals after allocation Method Direct Step Machining Department $ 574,000 570,000 Assembly Department $ 976,000 980,000
Learning Objective 2
McGraw-Hill/Irwin
Result
When one department decreases activity to reduce allocations, all departments are penalized because the charge per use increases.
Solution
Use dual allocation method, allocating fixed and variable costs separately.
Charge to production departments at a budgeted rate times actual short-run usage of the allocation base.
Allocate budgeted amounts to operating departments in proportion to the long-run average usage of the allocation base.
Allocate Charge to budgeted amounts production to operating departments departments at a in proportion to the budgeted rate times long-run average actual short-run usage of usage of the Budgeted costs should be allocated the allocation base. allocation base.
Variable costs are allocated based on hours used. Fixed costs are allocated based long-run average usage.
A Behavioral Problem
Problem
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.
Learning Objective 3
McGraw-Hill/Irwin
Activity Two
Learning Objective 4
McGraw-Hill/Irwin
Product
Product
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.
Consider the following example of an oil refinery. We will assume only two products, gasoline and oil.
Oil
Separate Processing
Final Sale
Joint Input
Gasoline
Separate Processing
Final Sale
Split-Off Point
Learning Objective 5
McGraw-Hill/Irwin
Relative-SalesValue Method
Net-RealizableValue Method
Physical-Units Method
Joint conversion cost = $225,000
Oil
240,000 gallons
Gasoline
360,000 gallons
Split-Off Point
Physical-Units Method
Product Oil Output quantities in gallons Proportionate share: 240,000 ? ? Allocated joint costs: ? ? Gasoline 360,000 Total 600,000
Physical-Units Method
Product Oil Output quantities in gallons Proportionate share: 240,000 600,000 360,000 600,000 Allocated joint costs: ? ? 240,000 40% 60% Gasoline 360,000 Total 600,000
Physical-Units Method
Product Oil Output quantities in gallons Proportionate share: 240,000 600,000 360,000 600,000 Allocated joint costs: $500,000 40% $500,000 60% 240,000 40% 60% $ 200,000 $ 300,000 Gasoline 360,000 Total 600,000
Relative-Sales-Value Method
Joint conversion cost = $225,000
Oil
Gasoline
Split-Off Point
Relative-Sales-Value Method
Product Oil Sales value at split-off point Proportionate share: Gasoline Total $ 200,000 $ 600,000 $ 800,000 ? ? Allocated joint costs: ? ?
Relative-Sales-Value Method
Product Oil Sales value at split-off point Proportionate share: $200,000 $800,000 $600,000 $800,000 Allocated joint costs: ? ? Gasoline Total $ 200,000 $ 600,000 $ 800,000 25% 75%
Relative-Sales-Value Method
Product Oil Sales value at split-off point Proportionate share: $200,000 $800,000 $600,000 $800,000 Allocated joint costs: $500,000 25% $500,000 75% Gasoline Total $ 200,000 $ 600,000 $ 800,000 25% 75% $ 125,000 $ 375,000
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
Net-Realizable-Value Method
Joint conversion cost = $225,000
Oil
Separate Processing Separate Processing Costs $200,000 Separate Processing Sales Value $1,200,000 Sales Value $500,000
Gasoline
Net-Realizable-Value Method
Product Oil Sales value Less additional processing costs Estimated NRV at split-off point Proportionate share: Gasoline Total $ 500,000 $ 1,200,000 $ 1,700,000 ? ? ? ? ? ? ? ? Allocated joint costs: ? ?
Net-Realizable-Value Method
Product Oil Sales value Less additional processing costs Estimated NRV at split-off point Proportionate share: Gasoline Total $ 500,000 $ 1,200,000 $ 1,700,000 200,000 500,000 700,000 $ 300,000 $ 700,000 $ 1,000,000 ? ? Allocated joint costs: ? ?
Net-Realizable-Value Method
Product Oil Sales value Less additional processing costs Estimated NRV at split-off point Proportionate share: $300,000 $1,000,000 $700,000 $1,000,000 Allocated joint costs: ? ? Gasoline Total $ 500,000 $ 1,200,000 $ 1,700,000 200,000 500,000 700,000 $ 300,000 $ 700,000 $ 1,000,000 30% 70%
Net-Realizable-Value Method
Product Oil Sales value Less additional processing costs Estimated NRV at split-off point Proportionate share: $300,000 $1,000,000 $700,000 $1,000,000 Allocated joint costs: $500,000 30% $500,000 70% Gasoline Total $ 500,000 $ 1,200,000 $ 1,700,000 200,000 500,000 700,000 $ 300,000 $ 700,000 $ 1,000,000 30% 70% $ 150,000 $ 350,000
By-Products
Joint Costs
Major Product
Joint Input
Major Product
By-products
Split-Off Point
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.
Learning Objective 6
McGraw-Hill/Irwin
Fully accounts for reciprocal services More accurate Can be combined with dual allocation
End of Chapter 18
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