Cost management accounting and control 6e by hansen mowen guan chapter 07

1 Accounting & Control Hansen▪Mowen▪Guan Chapter 7 Allocating Costs of Support Departments and Joint Products... Allocate support center costs to producing departments using the direct

COST MANAGEMENT

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Accounting & Control

Hansen▪Mowen▪Guan

Chapter 7 Allocating Costs of Support Departments

and Joint Products

Study Objectives

1 Describe the difference between support departments

and producing departments.

2 Calculate charging rates, and distinguish between

single and dual charging rates.

3 Allocate support center costs to producing departments

using the direct method, the sequential method, and the reciprocal method.

4 Calculate departmental overhead rates.

5 Identify the characteristics of the joint production

process, and allocate joint costs to products.

An Overview of Cost Allocation

• Allocation is dividing a pool of costs and assigning those costs to subunits

• The cost objects must be determined

• Cost objects are usually departments

– Producing: creating products sold to

customers

– Support: provide essential services for

producing departments

Departmentalization: Manufacturing Firm

Departmentalization:

Service Firm

Allocating Support Department Costs to Producing Departments

• Departmentalize the firm

• Classify each department as support or producing

• Trace all overhead costs in the firm to the appropriate department

• Allocate support department costs to producing

An Overview of Cost Allocation

Allocating One Department’s Costs

to Another Department

• The costs of a support department are

often allocated through the use of a

charging rate

• Major factors of rate selection:

– Choice of single or dual rate

– Use of budgeted or actual support department costs

Allocating One Department’s Costs

to Another Department

• Developing a fixed rate

– Determine budgeted fixed costs

– Compute allocation ratio

– Allocate

• Developing the variable rate

– Depends on the costs that change as the activity driver changes

Fixed costs + estimated variable costsSingle =rate

estimated usageDual rate: Fixed rate and a variable rate

Answer: Budgeted – to prevent the

transfer of efficiencies or inefficiencies

from one department to another.

Allocating One Department’s Costs

to Another Department

Allocating One Department’s Costs

to Another Department

Choosing a Support Department

Cost Allocation Method

• Direct method

– Costs are allocated only to producing

departments

• Sequential (step) method

– Costs allocations are performed in a step-down fashion, using predetermined ranking

procedures (e.g., degree of support)

• Reciprocal method

– Recognizes interactions of support

departments prior to allocation to producing

departments

Choosing a Support Department

Cost Allocation Method

Direct allocation

Sequential allocation

• Rank support departments by their direct costs

• Allocate

– First support department’s direct cost to all other

support departments and producing departments

– Next support department’s costs (direct + previously allocated) to subsequent support and producing

– Etc.

• Once a support department’s costs are allocated

it never receives a subsequent allocation

Sequential allocation

Reciprocal allocation

Reciprocal allocation

Choosing a Support Department

Cost Allocation Method

Departmental Overhead Rates

and Product Costing

After allocating all support service costs to producing departments, an overhead rate is calculated for each department

Departmental Overhead Rates

and Product Costing

A product cost can now be determined:

Direct materials + Direct labor

+ Assigned overhead

Product cost

process up to a “split-off” point.

– The split-off point is the point at which the joint products become separate and identifiable

• Separable costs are easily traced to

individual products and offer no particular problem.

Accounting for Joint Production Processes

Accounting for Joint Production Processes

Accounting for Joint Production Processes

• The distinction between joint and

by-products rests solely on the relative

importance of their sales value.

• A by-product is a secondary product

recovered in the course of manufacturing

a primary product.

– Joint costs are not typically allocated

– Sales revenue is classified as “other income”– Post-split-off processing costs are deducted from sales revenue

Joint Cost Allocation Methods

• Physical Units Method

– Presumes that each unit of the final product costs as much to produce as any other

• Weighted Average Method

– Applies weight factors to reflect differing

materials, complexity, time, etc

A sawmill processes logs into four grades of lumber

and incurs total joint costs of $186,000:

Joint Cost Allocation:

Physical Units Method

A peach canning factory purchases $5,000 of peaches and grades and cans them by quality.

Joint Cost Allocation:

Weighted Average Method

Joint Cost Allocation Methods

– Allocates joint cost based on each product’s

proportionate share of sales value at split-off

– Allocates joint cost based on hypothetical market price

(eventual market value minus processing costs beyond split-off)

– Allocates joint costs such that the gross margin is the same for each product

A sawmill processes logs into four grades of lumber

and incurs total joint costs of $186,000:

Joint Cost Allocation:

Sales-Value-at-Split-Off Method

Joint Cost Allocation:

Net Realizable Value Method

A company manufactures two products, Alpha and Beta, from a joint process One production run costs $5,750 and results in 1,000 gallons of Alpha and 3,000 gallons of Beta The separable cost for Alpha is $1 per gallon and for Beta is $2 per gallon.

Joint Cost Allocation:

Constant Gross Margin Method

Determine gross margin percentage

Joint cost

allocation

COST MANAGEMENT

COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning.

Cengage Learning and South-Western are trademarks used herein under license 40

Accounting & Control

Hansen▪Mowen▪Guan

End Chapter 7