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Service Department Costing: An Activity Approach

Chapter 15. Service Department Costing: An Activity Approach. Operating Departments. Service Departments. Carry out the central purposes of an organization. Provide support to the operating departments. The Need for Cost Allocations.

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Service Department Costing: An Activity Approach

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  1. Chapter 15 Service Department Costing: An Activity Approach

  2. OperatingDepartments ServiceDepartments Carry out the central purposesof an organization Provide supportto theoperatingdepartments The Need for Cost Allocations

  3. First, we identify the factor that drives costs in theservice department. Thiscost driver is usedas theallocation base. How are servicedepartment costscharged to operatingdepartments? The Need for Cost Allocations

  4. Second, we measure theconsumption of theallocation base in theoperating departments. The Need for Cost Allocations

  5. Third, we allocatethe servicedepartment costbased on therelative amount of the allocation baseused in eachoperating department. The Need for Cost Allocations

  6. What happens toservice departmentcosts after theyare allocated tooperatingdepartments? Allocated service departmentcosts become a part ofthe overhead in eachoperating department. The Need for Cost Allocations

  7. I get it. They becomea part of the overheadthat is applied toproducts with apredeterminedoverhead rate. That’s right. Take a lookat this flow chart. I think it will summarizeour discussion of theallocation process. The Need for Cost Allocations

  8. First Stage Allocations Service department costs are allocated to operating departments. The Need for Cost Allocations Service Department (Cafeteria) Operating Department (Machining) Service Department (Accounting) The Products Operating Department (Assembly) Service Department (Personnel)

  9. Second Stage Allocations Operating department overhead costs and allocated service department costs are applied to products. The Need for Cost Allocations Service Department (Cafeteria) Operating Department (Machining) Service Department (Accounting) The Products Operating Department (Assembly) Service Department (Personnel)

  10. $ ServiceDepartments OperatingDepartments Allocation bases Interdepartmental services Allocating costs by behavior Allocation pitfalls to avoid Allocation of actual or budgeted costs Guidelines for Cost Allocation

  11. Criteria Easiest Selecting Allocation Bases Personnel: Number ofemployees Custodial: Squarefootage Receiving: Unitshandled Cafeteria: Number ofemployees Security: Squarefootage Accounting: Staffhours Power: Kilowatthours

  12. Criteria Availabilityof space orequipment Selecting Allocation Bases Personnel: Number ofemployees Custodial: Squarefootage Receiving: Unitshandled Cafeteria: Number ofemployees Security: Squarefootage Accounting: Staffhours Power: Kilowatthours

  13. Criteria Benefits receivedby the operatingdepartment Selecting Allocation Bases Personnel: Number ofemployees Custodial: Squarefootage Receiving: Unitshandled Cafeteria: Number ofemployees Security: Squarefootage Accounting: Staffhours Power: Kilowatthours

  14. Criteria Selecting Allocation Bases Personnel: Number ofemployees Custodial: Squarefootage Consumption of resources Receiving: Unitshandled Cafeteria: Number ofemployees Security: Squarefootage Accounting: Staffhours Power: Kilowatthours

  15. Interdepartmental Services Problem Allocating costs when service departmentsprovide services to each other Solutions Direct Method Step method Reciprocal method

  16. Interactionsbetween service departments areignored and all costs areallocated directlyto operatingdepartments. Direct Method Service Department (Cafeteria) Operating Department (Machining) Service Department (Custodial) Operating Department (Assembly)

  17. Direct Method Example

  18. Direct Method Example

  19. 20 20 + 30 $360,000 × = $144,000 Direct Method Example Allocation base: Number of employees

  20. 30 20 + 30 $360,000 × = $216,000 Direct Method Example Allocation base: Number of employees

  21. 25,000 25,000 + 50,000 $90,000 × = $30,000 Direct Method Example Allocation base: Square feet occupied

  22. 50,000 25,000 + 50,000 $90,000 × = $60,000 Direct Method Example Allocation base: Square feet occupied

  23. Once a servicedepartment’s costsare allocated, other servicedepartment costsare not allocatedback to it. Step Method Service Department (Cafeteria) Operating Department (Machining) Service Department (Custodial) Operating Department (Assembly)

  24. Custodial willhave a newtotal to allocateto operatingdepartments; itsown costs plusthose costsallocated fromthe cafeteria. Step Method Service Department (Cafeteria) Operating Department (Machining) Service Department (Custodial) Operating Department (Assembly)

  25. Step Method Example We will use the same data used in the direct method example.

  26. Step Method Example Allocate Cafeteria costs first sinceit provides more service than Custodial.

  27. 10 10 + 20 + 30 $360,000 × = $60,000 Allocation base: Number of employees Step Method Example

  28. 20 10 + 20 + 30 $360,000 × = $120,000 Allocation base: Number of employees Step Method Example

  29. 30 10 + 20 + 30 $360,000 × = $180,000 Allocation base: Number of employees Step Method Example

  30. New total = $90,000 original custodial cost plus $60,000 allocated from the cafeteria. Step Method Example

  31. 25,000 25,000 + 50,000 $150,000 × = $50,000 Allocation base: Square feet occupied Step Method Example

  32. 50,000 25,000 + 50,000 $150,000 × = $100,000 Allocation base: Square feet occupied Step Method Example

  33. Interdepartmentalservices are givenfull recognitionrather than partialrecognition as withthe step method. Reciprocal Method Service Department (Cafeteria) Operating Department (Machining) Service Department (Custodial) Operating Department (Assembly) Because of its mathematical complexity, the reciprocal method is rarely used.

  34. Comparison of Methods

  35. Quick Check Data The direct method of allocation is used. • Allocation bases: • Business school administration costs (ADMIN): Number of employees • Business administration computer services (BACS): Number of personal computers

  36. Quick Check  How much cost will be allocated from Administration to Accounting? a. $ 36,000 b. $144,000 c. $180,000 d. $ 27,000

  37. 20 20 + 80 $180,000 × = $36,000 Quick Check  How much cost will be allocated from Administration to Accounting? a. $ 36,000 b. $144,000 c. $180,000 d. $ 27,000

  38. Quick Check  How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department? a. $ 52,500 b. $135,000 c. $270,000 d. $ 49,500

  39. 18 18 + 102 $90,000 × = $13,500 Quick Check  How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department? a. $ 52,500 b. $135,000 c. $270,000 d. $ 49,500

  40. Quick Check Data The step method of allocation is used. • Allocation bases: • Business school administration costs (ADMIN): Number of employees • Business administration computer services (BACS): Number of personal computers

  41. Quick Check  How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department? a. $35,250 b. $49,072 c. $18,000 d. $26,333

  42. Quick Check  How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department? a. $35,250 b. $49,072 c. $18,000 d. $26,333

  43. My performance lookedgood until they allocated those service department costs, so I’m not going to usethe service again. But that would not be beneficial to the company; most of those costs are fixed. What if we charged a flat annual fee for the service? Allocating Fixed Costs

  44. That sounds better. If the fee is fixed,the more I use theservice the lower myaverage cost peruse will be. Allocating Fixed Costs

  45. VariableCosts FixedCosts Allocatebudgetedamountsto operating departmentsin proportion to thepeak-period capacityrequired by the operating department. Chargetooperatingdepartments at abudgeted rate timesthe usageof the allocation base. Allocating Costs by Behavior

  46. VariableCosts FixedCosts Chargetooperatingdepartments at abudgeted rate timesthe usageof the allocation base. Budgeted costs should be allocatedto avoid passing on inefficienciesfrom the service departments. Allocating Costs by Behavior Allocatebudgetedamountsto operating departmentsin proportion to thepeak-period capacityrequired by the operating department.

  47. Allocating Costs by Behavior Allocations are made at the beginning of theperiod to provide data for predetermined overhead rates and flexible budgets. Allocations are made at the end of the period to provide data for comparing actualperformance to planned performance.

  48. Allocating Costs by BehaviorExample SimCo has a maintenance department and two operatingdepartments: cutting and assembly. Variable maintenancecosts are budgeted at $0.60 per machine hour. Fixedmaintenance costs are budgeted at $200,000 per year.Data relating to the current year are: Allocate maintenance costs to the two operating departments.

  49. Hours planned Allocating Costs by BehaviorExample: Beginning of the Period

  50. Percent of peak-period capacity. Allocating Costs by BehaviorExample: Beginning of the Period

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