7 -1

Support
Department
Cost
Allocation
CHAPTER
7 -2
1. Describe the difference between support
departments and producing departments.
2. Calculate single and multiple changing rates
for a support department.
3. Allocate support-department costs to
producing departments using the direct,
sequential, and reciprocal methods.
4. Calculate departmental overhead rates.
Objectives
After studying this
chapter, you should
be able to:
7 -3
Types of Departments
Producing
departments are
directly responsible for
creating the products or
services sold to
customers.
7 -4
Types of Departments
Supporting
departments provide
essential support
services for producing
departments.
Maintenance, grounds,
engineering, personnel, storage
7 -5
1. Departmentalize the firm.
2. Classify each department as a support
department or a producing department.
3. Trace all overhead costs in the firm to a
support department or producing
department.
4. Allocate supports department costs to the
producing departments.
Steps in Allocating Support Department
Costs to Producing Departments
Continued
7 -6
5. Calculate predetermined overhead rates
for the producing departments.
6. Allocate overhead costs to the units of
individual products through the
predetermined overhead rates.
Steps in Allocating Support Department
Costs to Producing Departments
7 -7
Examples of Cost Drivers for
Support Departments
Accounting Number of transactions
Cafeteria Number of employees
Engineering Number of change orders
Maintenance Machine hours; maintenance
hours
Payroll Number of employees
Personnel Number of employees, firings,
layoffs, new hires
Support Department Possible Driver
7 -8
1. To obtain a mutually agreeable price.
2. To compute product-line profitability.
3. To predict the economic effects of planning
and control.
4. To value inventory.
5. To motivate managers.
Objectives of Allocation
7 -9
Note Objective 5: Allocations can
be used to motivate managers.
7 -10
AND
Fixed costs $26,190
Variable costs.. $0.023 per page
7 -11
Estimated usage (in pages) by the three producing
departments is as follows:
Audit Department 94,500
Tax Department 67,500
MAS Department 108,000
Total 270,000
Variable cost: 270,000 x $0.023 $ 6,210
Fixed cost 26,190
Total cost for 270,000 pages $32,400
Average cost ($32,400 270,000) $0.12 per page
A Single Charge Rate
7 -12
A Single Charge Rate
Total Photocopying Department Charge
Number
of Pages
Charge
per Page
Total
Charges
x =
Audit Department 92,000 $0.12 $11,040
Tax Department 65,000 0.12 7,800
MAS Department 115,000 0.12 13,800
Total 272,000 $32,640
7 -13
Multiple Charging Rates
Peak
Number
of Pages
Proportion
of Peak
Usage
Total
Fixed
Costs
Amount
Allocated to
Each
Department
Audit 7,875 0.20 $26,190 $ 5,238
Tax 22,500 0.57 26,190 14,928
MAS 9,000 0.23 26,190 6,024
Total 39,375 $26,190
7 -14
Multiple Charging Rates
Number of
Pages x
$0.023
Fixed Cost
Allocation
Total
Charges
Audit department $2,116 $ 5,238 $ 7,354
Tax department 1,495 14,928 16,423
MAS department 2,645 6,024 8,669
Total $6,256 $26,190 $32,446
+ =
7 -15
Budgeted Versus Actual Usage
When we allocate support-
department costs to the producing
departments, should we allocate
actual or budgeted costs?
7 -16
Budgeted Versus Actual Usage
Budgeted costs.
7 -17
Budgeted Versus Actual Usage
A general principle of performance evaluation is
that managers should not be held responsible for
costs or activities over which they have no control.
7 -18
Use of Budgeted Data for
Product Costing
Number of
Copies
Total
Rate
Allocated
Charges
Audit Department 94,500 $0.12 $11,340
Tax Department 67,500 0.12 8,100
MAS Department 108,000 0.12 12,960
Total 270,000 $32,400
x =
7 -19
Use of Actual Data for
Performance Evaluation Purposes
Number of
Copies
Total
Rate
Allocated
Charges
Audit department 92,000 $0.12 $11,040
Tax department 65,000 0.12 7,800
MAS department 115,000 0.12 13,800
Total 272,000 $32,640
x =
7 -20
Choosing A Service Department
Cost Allocation Method
The three methods for allocating service
department costs to producing departments
are:
The Direct Method
The Sequential Method
The Reciprocal Method
7 -21
Support Departments Producing Departments

Direct costs* $250,000 $160,000 $100,000 $ 60,000
Normal activity:
Kilowatt-hours ----- 200,000 600,000 200,000
Maintenance hours 1,000 ----- 4,500 4,500

*For a producing department, direct costs refer only to
overhead costs that are directly traceable to the department.
Data for Illustrating Allocation Methods
Power Maintenance Grinding Assembly
7 -22
Direct Method of Allocation
Power Maintenance
Grinding Assembly
7 -23
Direct Method of Allocation
Power Maintenance
Grinding Assembly
7 -24
STEP 1CALCULATE ALLOCATION RATIOS
Grinding Assembly
Power =
600,000
(600,000 + 200,000)
0.75
200,000
(600,000 + 200,000)
0.25
Maintenance =
4,500
(4,500 + 4,500)
0.50
4,500
(4,500 + 4,500)
0.50
Direct Method
7 -25
STEP 2ALLOCATE SUPPORTS DEPARTMENT
COSTS USING THE ALLOCATION RATIOS
Power Maintenance Grading Assembly
Support Departments Producing Departments
Direct costs $250,000 $160,000 $100,000 $ 60,000
Power -250,000 --- 187,500 62,500
Maintenance --- -160,000 80,000 80,000
$ 0 $ 0 $367,500 $202,500
a
b
a
0.75 x $250,000 = $187,500; 0.25 x $250,000 = $62,500
0.50 x $160,000 = $80,000
b
Direct Method
7 -26
Sequential Method of Allocation
STEP 1: Rank service departments
Power
1
Maintenance
2
7 -27
Sequential Method of Allocation
Power
Maintenance Assembly Grinding
STEP 2
7 -28
Sequential Method of Allocation
Maintenance
Assembly
Grinding
STEP 2
7 -29
STEP 1CALCULATE ALLOCATION RATIOS
Maint. Grinding Assembly
Power =
200,000
(200,000 + 600,000 +
200,000)
0.20
600,000
(200,000 + 600,000 +
200,000)
0.60
Sequential Method
7 -30
STEP 1CALCULATE ALLOCATION RATIOS
Maint. Grinding Assembly
4,500
(4,500 + 4,500)
0.50
Mainte-
nance
4,500
(4,500 + 4,500)
0.50
=
Sequential Method
7 -31
STEP 2ALLOCATE SUPPORT DEPARTMENT
COSTS USING THE ALLOCATION RATIOS
Power Maintenance Grading Assembly
Support Departments Producing Departments
Direct costs $250,000 $160,000 $100,000 $ 60,000
Power -250,000 50,000 150,000 50,000
Maintenance --- -210,000 105,000 105,000
$ 0 $ 0 $355,000 $215,000
a
b
a
0.20 x $250,000 = $50,000; 0.60 x $250,000 = $150,000;
0.20 x $250,000 = $50,000
0.50 x $210,000 = $105,000
b
Sequential Method
7 -32
The reciprocal method of
allocation recognizes all
interactions among
support departments.


7 -33
Power Maintenance Grading Assembly
Support Departments Producing Departments
Normal activity:
Kilowatt-hours --- 200,000 600,000 200,000
Maintenance
hours 1,000 --- 4,500 4,500
Reciprocal Method
Power Maintenance Grading Assembly
Proportion of Output Used by Departments
Allocated ratios:
Power --- 0.20 0.60 0.20
Maintenance 0.10 --- 0.45 0.45
Direct costs:
7 -34
M = Direct costs + Share of Powers costs
M = $160,000 + $50,000 + 0.02M
0.98M = $210,000
M = $214,286
7 -35
P = Direct cost + Share of Maintenances cost
= $250,000 + 0.1($214,286) P
= $250,000 + $21,429 P
= $271,429 P
7 -36
ALLOCATE SUPPORT DEPARTMENT COSTS
USING THE ALLOCATION RATIOS AND THE
SUPPORT-DEPARTMENT COSTS FROM
RECIPROCAL METHODS EQUATIONS
Power Maintenance Grading Assembly
Support Departments Producing Departments
Direct costs $250,000 $160,000 $100,000 $ 60,000
Power -271,429 54,286 162,857 54,286
Maintenance 271,429 -214,286 96,429 96,429
Total $ 0 $ 0 $359,286 $210,715
from
Slide 7-34
from
Slide 7-35
7 -37
Direct Method
Grinding Assembly
Comparison of Support Department Cost
Allocations Using the Direct, Sequential, and
Reciprocal Methods
Direct costs $100,000 $ 60,000
Allocated from power 187,500 62,500
Allocated from maintenance 80,000 80,000
Total cost $367,500 $202,500
Click on button to compare with sequential method
Click on button to compare with reciprocal method
Return to
show
7 -38
Sequential Method
Grinding Assembly
Comparison of Support Department Cost
Allocations Using the Direct, Sequential, and
Reciprocal Methods
Direct costs $100,000 $ 60,000
Allocated from power 150,000 50,000
Allocated from maintenance 105,000 105,000
Total cost $355,000 $215,000
Click on button to compare with direct method
Click on button to compare with reciprocal method
Return to
show
7 -39
Reciprocal Method
Grinding Assembly
Comparison of Support Department Cost
Allocations Using the Direct, Sequential, and
Reciprocal Methods
Direct costs $100,000 $ 60,000
Allocated from power 162,857 54,286
Allocated from maintenance 96,429 96,429
Total cost $359,286 $210,715
Click on button to compare with direct method
Click on button to compare with sequential method
Return
to show
7 -40
Departmental Overhead Rates
The overhead rate for the grinding department is computed
as follows (assuming the normal level of activity is 71,000
MH):
OH rate =$355,000 71,000 =$5 per MH
The overhead rate for the assembly department is computed
as follows (assuming the normal level of activity is 107,500
DLH):
OH rate =$215,000 107,500 =$2 per DLH
7 -41
Product Unit Cost
A product requires two machine hours of
grinding per unit and one hour of assembly.
Overhead cost assigned:
2 x $5 $10
1 x $2 2
Total assigned $12
7 -42
The End
Chapter Seven
7 -43