Professional Documents
Culture Documents
Allocation of
Support Activity
Costs and Joint
Costs
McGraw-Hill/Irwin
Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective 1
17-2
17-2
17-3
Production
Departments
support
Provide support
that facilitates the
activities of production
departments.
17-4
17-5
17-6
17-7
17-8
17-9
Production
Department
(Machining)
Production
Department
(Assembly)
The
Product
Typical
Allocation
Bases
Receiving:
Units
handled
Security:
Square
footage
Custodial:
Square
footage
Cafeteria:
Number of
employees
Accounting:
Staff
hours
Power:
Kilowatt
hours
17-11
Criteria for
selection
Simplicity
Availability
of space or
equipment
Benefits received
by the production
department
Accounting:
Staff
hours
Custodial:
Square
footage
Cafeteria:
Number of
employees
Power:
Kilowatt
hours
17-12
Interdepartmental Services
Service
Department
(Cafeteria)
Production
Department
(Machining)
POWER DEPARTMENT
Service
Department
(Custodial)
Production
Department
(Assembly)
17-13
Interdepartmental Services
Problem
Allocating costs when service departments
provide services to each other
Solutions
Direct Method
Step-Down Method
17-14
Direct Method
Cost of services
between service
departments are
ignored and all
costs are
allocated directly
to production
departments.
Service
Department
(Cafeteria)
Production
Department
(Machining)
Service
Department
(Custodial)
Production
Department
(Assembly)
Step-Down Method
Service department
costs are allocated
to other service
departments and
to production
departments, usually
starting with the
service department
that serves the
largest number of
other service
departments.
Service
Department
(Cafeteria)
Production
Department
(Machining)
Service
Department
(Custodial)
Production
Department
(Assembly)
17-16
Step-Down Method
Once a service
departments costs
are allocated,
other service
departments costs
are not allocated
back to it.
Service
Department
(Cafeteria)
Production
Department
(Machining)
Service
Department
(Custodial)
Production
Department
(Assembly)
17-17
Step-Down Method
Custodial will
have a new
total to allocate
to production
departments: its
own costs plus
those costs
allocated from
the cafeteria.
Service
Department
(Cafeteria)
Production
Department
(Machining)
Service
Department
(Custodial)
Production
Department
(Assembly)
Learning Objective 2
17-19
Result
When one department
decreases activity to
reduce allocations, all
departments are penalized
because the charge
per use increases.
Remember, total fixed
costs do not change as
activity changes.
17-20
Solution
Use dual allocation
method, allocating
fixed and variable
costs separately.
17-21
Charge to
production
departments at a
budgeted rate times
actual short-run usage of
the allocation base.
Allocate
budgeted amounts
to operating departments
in proportion to the
long-run average
usage of the
allocation base.
Production
Departments
Cutting
Assembly
Total
Long-run
Maintenance
Usage as a
% of Total
60%
40%
100%
Actual
Hours
Used
80,000
40,000
120,000
Assembly
Department
48,000
$
24,000
80,000
104,000
120,000
$
168,000
A Behavioral Problem
Problem
Solution
Department managers
may underestimate
long-run average usage
to reduce fixed cost
allocations.
17-25
Learning Objective 3
17-26
17-27
Activity
Two
17-28
Learning Objective 4
17-29
Joint Product
Costs
Product
Product
17-30
Key terms:
Joint products products resulting from a process
17-31
17-32
Oil
Joint
Production
Process
Final
Sale
Separate
Processing Costs
Gasoline
Split-Off
Point
Separate
Processing
Separate
Processing
Final
Sale
Separate
Processing Costs
17-33
Learning Objective 5
17-34
Joint Product
Costs
RelativeSales-Value
Method
Net-RealizableValue Method
17-35
Allocation based on a
physical measure of the
joint products at the
split-off point.
Relative-SalesValue Method
Allocation based on
the relative values
of the products at
the split-off point.
Net-RealizableValue Method
Allocation based on
final sales values less
separable processing
costs.
17-36
Lets look at an
example illustrating
the joint cost
allocation methods.
17-37
Physical-Units Method
Joint conversion
cost = $225,000
Joint material
cost = $275,000
Oil
240,000 gallons
Joint
Production
Process
Gasoline
360,000 gallons
Split-Off
Point
17-38
Physical-Units Method
Product
Oil
Output quantities in gallons
Proportionate share:
240,000 600,000
360,000 600,000
Allocated joint costs:
$500,000 40%
$500,000 60%
240,000
Gasoline
360,000
Total
600,000
40%
60%
$ 200,000
$ 300,000
Relative-Sales-Value Method
Joint conversion
cost = $225,000
Joint material
cost = $275,000
Oil
$200,000
sales value at
split-off point
Gasoline
$600,000
sales value at
split-off point
Joint
Production
Process
Split-Off
Point
17-40
Relative-Sales-Value Method
Product
Oil
Sales value at split-off point
Proportionate share:
$200,000 $800,000
$600,000 $800,000
Allocated joint costs:
$500,000 25%
$500,000 75%
Gasoline
Total
Net-Realizable-Value Method
If products require further processing
beyond the split-off point before they
are marketable, it may be necessary to
estimate the net realizable value (NRV)
at the split-off point.
Estimated
NRV
Final
Sales
Value
Added
Processing
Costs
17-42
Net-Realizable-Value Method
Joint conversion
cost = $225,000
Joint material
cost = $275,000
Oil
Joint
Production
Process
Separate
Processing Costs
$200,000
Gasoline
Split-Off
Point, Sales
Value Unknown
Sales
Value
$500,000
Separate
Processing
Separate
Processing
Sales
Value
$1,200,000
Separate
Processing Costs
$500,000
17-43
Net-Realizable-Value Method
Product
Oil
Sales value
Less additional processing costs
Estimated NRV at split-off point
Proportionate share:
$300,000 $1,000,000
$700,000 $1,000,000
Allocated joint costs:
$500,000 30%
$500,000 70%
Gasoline
Total
17-44
By-Products
Joint
Costs
Joint
Input
Joint
Production
Process
Major
Product
Major
Product
By-products
Relatively low
value or quantity
when compared to
major products
Split-Off
Point
17-45
By-Products
1. By-product NRV is
deducted from cost of
joint process before
allocation.
2. By-product NRV is
deducted from cost of
main product.
17-46
Learning Objective 6
17-47
Reciprocal-Services Method
Fully accounts for reciprocal services
More accurate
Can be combined with dual allocation
17-48
av
ai
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52
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35
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17
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End of Chapter 17
17-49