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8/9/2019 Service and Production DepartmentCost Allocation
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ServiceDepartment(Cafeteria)
ServiceDepartment(Accounting)
ServiceDepartment(Personnel)
Production
Department(Machining)
Production
Department(Assembly)
TheProduct
Directand
IndirectCosts
Service and Production DepartmentCost Allocation
8/9/2019 Service and Production DepartmentCost Allocation
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ServiceDepartment
(Cafeteria)Service
Department(Accounting)
ServiceDepartment(Personnel)
Production
Department(Machining)
Production
Department(Assembly)
TheProduct
Directand
IndirectCosts
Service and Production DepartmentCost Allocation
First Phase:Trace direct costsand allocate indirect costs to all departments
8/9/2019 Service and Production DepartmentCost Allocation
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ServiceDepartment(Cafeteria)
ServiceDepartment(Accounting)
ServiceDepartment(Personnel)
Production
Department(Machining)
Production
Department(Assembly)
TheProduct
Directand
IndirectCosts
Service and Production DepartmentCost Allocation
Second Phase: Allocateservice department costs
to production departments.
8/9/2019 Service and Production DepartmentCost Allocation
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ServiceDepartment(Cafeteria)
ServiceDepartment(Accounting)
ServiceDepartment(Personnel)
Production
Department(Machining)
Production
Department(Assembly)
TheProduct
Directand
IndirectCosts
Service and Production DepartmentCost Allocation
Third Phase: Allocate production department overhead
costs to products.
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Methods of Allocating ServiceDepartment Costs
Problem
Allocating costs when service departments
provide services to each other
Solutions
Direct methodStep method
eciprocal method
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Direct Method
ServiceDepartment(Cafeteria)
Service
Department(Custodial)
ProductionDepartment(Machining)
Production
Department(Assembly)
Cost of servicesbeteen servicedepartments areignored and all
costs areallocated directly
to user
departments!
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Direct Method !"ample
Service Department Allocation #ase
Cafeteria $umber of emplo%ees
Custodial S&uare feet occupied
Service Departments Production Departments
Cafeteria Custodial Machining Assembl%
Departmental costs before allocation '()*)))+ ,)*)))+ -))*)))+ .))*)))+
$umber of emplo%ees /0 /) 1) ')
S&uare feet occupied 0*))) 1*))) 10*))) 0)*)))
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Direct Method
Service Departments Production Departments
Cafeteria Custodial Machining Assembl%
Departmental costs
before allocation '()*)))+ ,)*)))+ -))*)))+ .))*)))+
Cafeteria allocation 2 2 2 2
Custodial allocation 2 2 2 2
Total after allocation 2 2 2 2
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Direct Method
Service Departments Production Departments
Cafeteria Custodial Machining Assembl%
Departmental costs
before allocation '()*)))+ ,)*)))+ -))*)))+ .))*)))+
Cafeteria allocation 3'()*)))4 ) /--*))) 2
Custodial allocation 2 2 2 2
Total after allocation 2 2 2 2
+'()*))) 5 1)1) 6 ')
7 +/--*)))
Allocation base: $umber of emplo%ees
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Direct Method
Service Departments Production Departments
Cafeteria Custodial Machining Assembl%
Departmental costs
before allocation '()*)))+ ,)*)))+ -))*)))+ .))*)))+
Cafeteria allocation 3'()*)))4 ) /--*))) 1/(*)))
Custodial allocation 2 2 2 2
Total after allocation 2 2 2 2
+'()*))) 5 ')1) 6 ')
7 +1/(*)))
Allocation base: $umber of emplo%ees
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Service Departments Production Departments
Cafeteria Custodial Machining Assembl%
Departmental costs
before allocation '()*)))+ ,)*)))+ -))*)))+ .))*)))+
Cafeteria allocation 3'()*)))4 ) /--*))) 1/(*)))
Custodial allocation ) 3,)*)))4 ')*))) 2
Total after allocation + ) + ) 0.-*)))+ 2
Direct Method
+,)*))) 5 10*)))10*))) 6 0)*)))
7 +')*)))
Allocation base: S&uare feet occupied
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Service Departments Production Departments
Cafeteria Custodial Machining Assembl%
Departmental costs
before allocation '()*)))+ ,)*)))+ -))*)))+ .))*)))+
Cafeteria allocation 3'()*)))4 ) /--*))) 1/(*)))
Custodial allocation ) 3,)*)))4 ')*))) ()*)))
Total after allocation + ) + ) 0.-*)))+ ,.(*)))+
Direct Method
0)*)))10*))) 6 0)*)))
7 +()*)))+,)*))) 5
Allocation base: S&uare feet occupied
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Step Method
Service departmentcosts are allocated
to other servicedepartments and
to productiondepartments" usually
starting ith theservice department
that provides thegreatest amount of
service to otherdepartments!
ServiceDepartment(Cafeteria)
Service
Department(Custodial)
ProductionDepartment(Machining)
Production
Department(Assembly)
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Step Method
ServiceDepartment(Cafeteria)
Service
Department(Custodial)
ProductionDepartment(Machining)
Production
Department(Assembly)
#nce a servicedepartment$s costs
are allocated"other service
department costsare not allocated
bac% to it!
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Step Method
Custodial illhave a ne
total to allocateto production
departments& itson costs plus
those costs
allocated fromthe cafeteria!
ServiceDepartment(Cafeteria)
Service
Department(Custodial)
ProductionDepartment(Machining)
Production
Department(Assembly)
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Step Method !"ample
Service Department Allocation #ase
Cafeteria $umber of emplo%ees
Custodial S&uare feet occupied
8e will use the same data used in the direct method e"ample.
Service Departments Production Departments
Cafeteria Custodial Machining Assembl%
Departmental costs before allocation '()*)))+ ,)*)))+ -))*)))+ .))*)))+
$umber of emplo%ees /0 /) 1) ')
S&uare feet occupied 0*))) 1*))) 10*))) 0)*)))
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Step Method
Service Departments Production Departments
Cafeteria Custodial Machining Assembl%
Departmental costs
before allocation '()*)))+ ,)*)))+ -))*)))+ .))*)))+
Cafeteria allocation 2 2 2 2
Custodial allocation 2 2 2 2
Total after allocation 2 2 2 2
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Step Method
Service Departments Production Departments
Cafeteria Custodial Machining Assembl%
Departmental costs
before allocation '()*)))+ ,)*)))+ -))*)))+ .))*)))+
Cafeteria allocation 3'()*)))4 ()*))) 2 2
Custodial allocation 2 2 2 2
Total after allocation 2 2 2 2
+'()*))) 5/)
/) 6 1) 6 ')7 +()*)))
Allocation base: $umber of emplo%ees
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Step Method
Service Departments Production Departments
Cafeteria Custodial Machining Assembl%
Departmental costs
before allocation '()*)))+ ,)*)))+ -))*)))+ .))*)))+
Cafeteria allocation 3'()*)))4 ()*))) /1)*))) 2
Custodial allocation 2 2 2 2
Total after allocation 2 2 2 2
+'()*))) 5 1)/) 6 1) 6 ')
7 +/1)*)))
Allocation base: $umber of emplo%ees
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Step Method
Service Departments Production Departments
Cafeteria Custodial Machining Assembl%
Departmental costs
before allocation '()*)))+ ,)*)))+ -))*)))+ .))*)))+
Cafeteria allocation 3'()*)))4 ()*))) /1)*))) /9)*)))
Custodial allocation 2 2 2 2
Total after allocation 2 2 2 2
+'()*))) 5 ')/) 6 1) 6 ')
7 +/9)*)))
Allocation base: $umber of emplo%ees
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Step Method
Service Departments Production Departments
Cafeteria Custodial Machining Assembl%
Departmental costs
before allocation '()*)))+ ,)*)))+ -))*)))+ .))*)))+
Cafeteria allocation 3'()*)))4 ()*))) /1)*))) /9)*)))
Custodial allocation 2 3/0)*)))4 2 2
Total after allocation 2 + ) 2 2
$ew total 7 +,)*))) original custodial costplus +()*))) allocated from the cafeteria.
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Step Method
Service Departments Production Departments
Cafeteria Custodial Machining Assembl%
Departmental costs
before allocation '()*)))+ ,)*)))+ -))*)))+ .))*)))+
Cafeteria allocation 3'()*)))4 ()*))) /1)*))) /9)*)))
Custodial allocation ) 3/0)*)))4 0)*))) 2
Total after allocation + ) + ) 0.)*)))+ 2
10*)))10*))) 6 0)*)))
7 +0)*)))+/0)*))) 5
Allocation base: S&uare feet occupied
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Step Method
Service Departments Production Departments
Cafeteria Custodial Machining Assembl%
Departmental costs
before allocation '()*)))+ ,)*)))+ -))*)))+ .))*)))+
Cafeteria allocation 3'()*)))4 ()*))) /1)*))) /9)*)))
Custodial allocation ) 3/0)*)))4 0)*))) /))*)))
Total after allocation + ) + ) 0.)*)))+ ,9)*)))+
7 +/))*)))+/0)*))) 5
Allocation base: S&uare feet occupied
0)*)))10*))) 6 0)*)))
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eciprocal Method
Interdepartmentalservices are given
full recognitionrather than partialrecognition as iththe step method!
ServiceDepartment(Cafeteria)
Service
Department(Custodial)
ProductionDepartment(Machining)
Production
Department(Assembly)
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eciprocal Method !"ample
Service Departments Production Departments
Cafeteria Custodial Machining Assembl%
Departmental costs before allocation '()*)))+ ,)*)))+ -))*)))+ .))*)))+
$umber of emplo%ees /0 /) 1) ')
S&uare feet occupied 0*))) 1*))) 10*))) 0)*)))
Service Department Allocation #ase
Cafeteria $umber of emplo%ees
Custodial S&uare feet occupied
8e will use the same data used in the previous e"amples.
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eciprocal Method
The total cost of each service department is e&ual to:
Direct costs of that department
6 Costs allocated to that department
The Cafeteria Department receives:
0*)))
0*))) 6 10*))) 6 0)*)))7 of Custodial costs.
//(
The Custodial Department receives:
/)
/) 6 1) 6 ')7 of Cafeteria costs.
/(
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eciprocal Method
Cu ' Total costs of Custodial Department
Ca ' Total costs of Cafeteria Department
n e&uation form:
Cu 7 +,)*))) 6 Ca
and
Ca 7 +'()*))) 6
Cu
/(
//(
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eciprocal Method
n e&uation form:
Cu 7 +,)*))) 6 Ca
and
Ca 7 +'()*))) 6 Cu
/(
//(
Two e&uations and two un;nowns are solved b% substitution:
Ca 7 +'()*))) 6 3+,)*))) 6 Ca4
Ca 7 +'(,*-- 3rounded4
and
Cu 7 +,)*))) 6 3+'(,*--4 7 +/0/*0,
/
/(
/
(
/(
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Service Departments Production Departments
Cafeteria Custodial Machining Assembl%
Departmental costs
before allocation '()*)))+ ,)*)))+ -))*)))+ .))*)))+
Cafeteria allocation 2 2 2 2
Custodial allocation 2 2 2 2
Total after allocation 2 2 2 2
eciprocal Method
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Service Departments Production Departments
Cafeteria Custodial Machining Assembl%
Departmental costs
before allocation '()*)))+ ,)*)))+ -))*)))+ .))*)))+
Cafeteria allocation 3'(,*-.-4 (/*0., 2 2
Custodial allocation 2 2 2 2
Total after allocation 2 2 2 2
+'(,*-- 5 /)/) 6 1) 6 ')
7 +(/*0,
Allocation base: $umber of emplo%ees
eciprocal Method
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Service Departments Production Departments
Cafeteria Custodial Machining Assembl%
Departmental costs
before allocation '()*)))+ ,)*)))+ -))*)))+ .))*)))+
Cafeteria allocation 3'(,*-.-4 (/*0., /1'*/09 2
Custodial allocation 2 2 2 2
Total after allocation 2 2 2 2
+'(,*-- 5 1)/) 6 1) 6 ')
7 +/1'*/09
Allocation base: $umber of emplo%ees
eciprocal Method
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Service Departments Production Departments
Cafeteria Custodial Machining Assembl%
Departmental costs
before allocation '()*)))+ ,)*)))+ -))*)))+ .))*)))+
Cafeteria allocation 3'(,*-.-4 (/*0., /1'*/09 /9-*.'.
Custodial allocation 2 2 2 2
Total after allocation 2 2 2 2
+'(,*-- 5 ')/) 6 1) 6 ')
7 +/9-*'
Allocation base: $umber of emplo%ees
eciprocal Method
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Service Departments Production Departments
Cafeteria Custodial Machining Assembl%
Departmental costs
before allocation '()*)))+ ,)*)))+ -))*)))+ .))*)))+
Cafeteria allocation 3'(,*-.-4 (/*0., /1'*/09 /9-*.'.
Custodial allocation ,*-.- 3/0/*0.,4 2 2
Total after allocation + ) + ) 2 2
eciprocal Method
0*)))0*))) 6 10*))) 6 0)*)))
7 +,*-- 3rounded4+/0/*0, 5
Allocation base: S&uare feet occupied
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Service Departments Production Departments
Cafeteria Custodial Machining Assembl%
Departmental costs
before allocation '()*)))+ ,)*)))+ -))*)))+ .))*)))+
Cafeteria allocation 3'(,*-.-4 (/*0., /1'*/09 /9-*.'.
Custodial allocation ,*-.- 3/0/*0.,4 -.*'(9 2
Total after allocation + ) + ) 0.)*01(+ 2
eciprocal Method
10*)))0*))) 6 10*))) 6 0)*)))
7 +-*'(9 3rounded4+/0/*0, 5
Allocation base: S&uare feet occupied
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Service Departments Production Departments
Cafeteria Custodial Machining Assembl%
Departmental costs
before allocation '()*)))+ ,)*)))+ -))*)))+ .))*)))+
Cafeteria allocation 3'(,*-.-4 (/*0., /1'*/09 /9-*.'.
Custodial allocation ,*-.- 3/0/*0.,4 -.*'(9 ,-*.'.
Total after allocation + ) + ) 0.)*01(+ ,.,*-.-+
eciprocal Method
0)*)))0*))) 6 10*))) 6 0)*)))
7 +,-*' 3rounded4+/0/*0, 5
Allocation base: S&uare feet occupied
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Comparison of Methods
Totals after allocation
Machining Assembl%
Method Department Department
Direct 0.-*)))+ ,.(*)))+
Step 0.)*))) ,9)*)))
eciprocal 0.)*01( ,.,*-.-
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Comparison of Methods
The reciprocal method is superior because&
It considers all services provided to otherservice departments!
The total cost of operating a service departmentis computed!
The reciprocal methodreuires the use of matri*algebra ith three or moreservice departments!
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+ointInput
CommonProductionProcess
,inalSale
,inal
Sale
Split-#ffPoint
+ointCosts #il
.asoline
Additional
Processing
SeparateProcessing Costs
AdditionalProcessing
SeparateProcessing Costs
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Sales valueat split=off
able?alue
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+ointInput
CommonProductionProcess
Split-#ffPoint
+ointCosts #il
.asoline
Ph%sical Measure Method
/01"111 gallons
231"111 gallons
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CommonProductionProcess
Split-#ffPoint
#il
.asoline
/01"111 gallons
231"111 gallons
+oint material
cost ' 4/56"111
+oint conversioncost ' 4//6"111
Ph%sical Measure Method
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Product
@il asoline Total
@utput &uantities in gallons 1-)*))) '()*))) ())*)))
Proportionate share:
2
2
Allocated Boint costs:
2
2
Ph%sical Measure Method
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Product
@il asoline Total
@utput &uantities in gallons 1-)*))) '()*))) ())*)))
Proportionate share:
1-)*))) ())*))) -)
'()*))) ())*))) ()
Allocated Boint costs:
2
2
Ph%sical Measure Method
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Product
@il asoline Total
@utput &uantities in gallons 1-)*))) '()*))) ())*)))
Proportionate share:
1-)*))) ())*))) -)
'()*))) ())*))) ()
Allocated Boint costs:
+0))*))) 5 -) 1))*)))+
+0))*))) 5 () '))*)))+
Ph%sical Measure Method
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+ointInput
CommonProductionProcess
Split-#ffPoint
+ointCosts #il
.asoline
Sales ?alue at Split=@ff Method
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+oint material
cost ' 4/56"111
CommonProductionProcess
Split-#ffPoint
+oint conversioncost ' 4//6"111 #il
.asoline
4/11"111sales value atsplit-off point
4311"111
sales value atsplit-off point
Sales ?alue at Split=@ff Method
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Product
@il asoline Total
Sales value at split=off point 1))*)))+ ())*)))+ 9))*)))+
Proportionate share:
2
2
Allocated Boint costs:
2
2
Sales ?alue at Split=@ff Method
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Product
@il asoline Total
Sales value at split=off point 1))*)))+ ())*)))+ 9))*)))+
Proportionate share:
+1))*))) +9))*))) 10
+())*))) +9))*))) 0
Allocated Boint costs:
2
2
Sales ?alue at Split=@ff Method
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Sales ?alue at Split=@ff Method
Product
@il asoline Total
Sales value at split=off point 1))*)))+ ())*)))+ 9))*)))+
Proportionate share:
+1))*))) +9))*))) 10
+())*))) +9))*))) 0
Allocated Boint costs:
+0))*))) 5 10 /10*)))+
+0))*))) 5 0 '0*)))+
4/56"111 7oint conversion cost plus4//6"111 7oint material cost
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$et eali>able ?alue Method
f products re&uire further processingbe%ond the split=off point before the%are mar;etable* it ma% be necessar% to
estimatethe net reali>able value at thesplit=off point.
8stimated9:;
,inalSales;alue
AddedProcessing
Costs'
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+ointInput
CommonProductionProcess
,inalSale
,inal
SaleSplit-#ff
Point
+ointCosts #il
.asoline
Additional
Processing
AdditionalProcessing Costs
AdditionalProcessing
AdditionalProcessing Costs
$et eali>able ?alue Method
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CommonProductionProcess
Sales;alue
4611"111
Split-#ffPoint" Sales
;alue
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Product
@il asoline Total
Sales value 0))*)))+ /*1))*)))+ /*.))*)))+
Eess additional processing costs 2 2 2
!stimated $? at split=off point 2 2 2Proportionate share:
2
2
Allocated Boint costs:
2
2
$et eali>able ?alue Method
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Product
@il asoline Total
Sales value 0))*)))+ /*1))*)))+ /*.))*)))+
Eess additional processing costs 1))*))) 0))*))) .))*)))
!stimated $? at split=off point '))*)))+ .))*)))+ /*)))*)))+Proportionate share:
2
2
Allocated Boint costs:
2
2
$et eali>able ?alue Method
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Product
@il asoline Total
Sales value 0))*)))+ /*1))*)))+ /*.))*)))+
Eess additional processing costs 1))*))) 0))*))) .))*)))
!stimated $? at split=off point '))*)))+ .))*)))+ /*)))*)))+Proportionate share:
+'))*))) +/*)))*))) ')
+.))*))) +/*)))*))) .)
Allocated Boint costs:
2
2
$et eali>able ?alue Method
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Product
@il asoline Total
Sales value 0))*)))+ /*1))*)))+ /*.))*)))+
Eess additional processing costs 1))*))) 0))*))) .))*)))
!stimated $? at split=off point '))*)))+ .))*)))+ /*)))*)))+Proportionate share:
+'))*))) +/*)))*))) ')
+.))*))) +/*)))*))) .)
Allocated Boint costs:
+0))*))) 5 ') /0)*)))+
+0))*))) 5 .) '0)*)))+
$et eali>able ?alue Method
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#%=Product Costing
=! Asset :ecognition Methods&
a! 9et :eali>able ;alue Method
b! #ther Income at Production Point Method
/! :evenue Methods&
a! #ther Income at Selling Point Method
b! Manufacturing Cost :eduction at Selling
Point Method