All rights reserved.Methods to Allocate Support Department Costs Single-rate method – allocates costs in each cost pool service department to cost objects production departments using
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Allocation of Support Department Costs,
Common Costs,and Revenues
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Allocating Costs of a Supporting
Department to Operating Departments
Supporting (Service) Department – provides the services that assist other internal
departments in the company
Operating (Production) Department – directly adds value to a product or service
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Methods to Allocate
Support Department Costs
Single-rate method – allocates costs in each cost pool (service department) to cost objects (production departments) using the same rate per unit of a single allocation base
No distinction is made between fixed and
variable costs in this method
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Methods to Allocate
Support Department Costs
Dual-Rate method – segregates costs within each cost pool into two segments: a variable-cost pool and a fixed-cost pool
Each pool uses a different cost-allocation base
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Allocation Method Tradeoffs
Single-Rate method is simple to implement, but treats fixed costs in a manner similar to variable costs
Dual-Rate method treats fixed and variable costs more realistically, but is more complex to
implement
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Allocation Bases
Under either method, allocation of support
costs can be based on one of the three
following scenarios:
1 Budgeted overhead rate and budgeted hours
2 Budgeted overhead rate and actual hours
3 Actual overhead rate and actual hours
Choosing between actual and budgeted
rates: budgeted is known at the beginning of the period, while actual will not be known
with certainty until the end of the period
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Comparative Allocation Bases Illustrated
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Methods of Allocating Support Costs to Production Departments
1. Direct
2. Step-Down
3. Reciprocal
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Direct Method
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Data Used in Cost Allocation Illustrations
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Direct Allocation Method Illustrated
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Direct Allocation Method Illustrated, cont.
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Step-Down Method
Allocates support costs to other support
departments and to operating departments that partially recognizes the mutual services provided among all support departments
One-Way Interaction between Support
Departments prior to allocation
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Step-Down Method
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Step-Down Allocation Method Illustrated
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Step-Down Allocation Method Illustrated, cont.
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Reciprocal Method
Allocates support department costs to
operating departments by fully recognizing the mutual services provided among all support
departments
Full Two-Way Interaction between Support
Departments prior to allocation
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Reciprocal Method
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Reciprocal Allocation Method (Repeated Iterations) Illustrated
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Reciprocal Allocation Method (Linear Equations) Illustrated
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Choosing Between Methods
Reciprocal is the most precise
Direct and Step-Down are simple to compute and understand
Direct Method is widely used
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Allocating Common Costs
Common Cost – the cost of operating a
facility, activity, or like cost object that is
shared by two or more users at a lower cost
than the individual cost of the activity to each user
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Methods of Allocating
Common Costs
Stand-Alone Cost-Allocation Method – uses
information pertaining to each user of a cost object as a separate entity to determine the cost-allocation weights
Individual costs are added together and
allocation percentages are calculated from the whole, and applied to the common cost
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Methods of Allocating
Common Costs
Incremental Cost-Allocation Method ranks the
individual users of a cost object in the order of users most responsible for a common cost and then uses this ranking to allocate the cost among the users
The first ranked user is the Primary User and is allocated costs up the cost as a stand-alone user (typically gets the highest allocation of the common costs)
The second ranked user is the First Incremental User and
is allocated the additional cost that arises from two users rather than one
Subsequent users handled in the same manner as the
second ranked user
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Cost Allocations and Contracting
The US government reimburses most
contractors in either of two main ways:
1 The contractor is paid a set price without
analysis of actual contract cost data.
2 The contractor is paid after an analysis of
actual contract cost data In some cases, the contract will state that the reimbursement
amount is based on actual allowable costs plus a fixed fee (cost-plus contract)
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Revenue Allocation and
Bundled Product – a package of two or more
products or services that are sold for single
price, but individual components of the bundle also may be sold as separate items at their own
“stand-alone” prices
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Methods to Allocate Revenue to Bundled
Products
Stand-Alone (separate) Revenue Allocation
Method uses product-specific information on the products in the bundle as weights for allocating the bundled revenues to the individual
products Three types of weights may be used:
1 Selling Prices
2 Unit Costs
3 Physical Units
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Methods to Allocate Revenue to Bundled
Products
Incremental Revenue-Allocation Method ranks
individual products in a bundle according to
criteria determined by management and then
uses this ranking to allocate bundled revenues to individual products (similar to earlier discussed Incremental Cost-Allocation Method)
The first-ranked product is the primary product
The second-ranked product is the first incremental
product
The third-ranked product is the second incremental
product, etc
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