Step-Down Method
Human Resources costs to be allocated become
$2,160,000 + $36,000 = $2,196,000.
Human Resources to Assembly:
48 ÷ 72 × $2,196,000 = $1,464,000
Human Resources to Finishing:
24 ÷ 72 × $2,196,000 = $732,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Step-Down Method
Human
Resources:
Assembly:
Finishing:
Costs before Allocated
allocation
costs
Allocated
costs
$2,160,000
$1,700,000
$ 900,000
($2,196,000)
$ 1,464,000
$ 732,000
$ 36,000
$132,000
$132,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Step-Down Method
Total cost after allocation:
Assembly Department:
$1,700,000 + $132,000 + $1,464,000 = $3,296,000
Finishing Department:
$900,000 + $132,000 + $732,000 = $1,764,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Reciprocal
M
HR
A
F
Maintenance
–
12%
44%
44%
Human Resources 10%
–
60%
30%
Maintenance cost = $300,000 + .10P
Human Resource cost = $2,160,000 + .12M
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Reciprocal
Maintenance cost (M)
= $300,000 + .10($2,160,000 + .12M)
M = $300,000 + $216,000 + .012M
.988M = $516,000  M = $522,267
HR = $2,160,000 + .12($522,267)
HR = $2,160,000 + $62,672 = $2,222,672
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Reciprocal
M
Before
allocation:
Allocation:
Allocation:
Total
HR
A
$300,000 $2,160,000 $1,700,000
(522,267)
62,672
229,797
222,267 ($2,222,672) 1,333,603
$3,263,400
F
$ 900,000
229,797
666,802
$1,796,599
Total cost Assembly Department: $3,263,400
Total cost Finishing Department: $1,796,599
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Overview of Methods
Overhead rate for the Assembly Department is
determined using direct labor cost as a denominator.
Overhead rate for the Finishing Department is
determined using machine-hours as the denominator.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Comparison of Methods
Assembly
Finishing
Direct labor cost:
$698,880
$349,440
Machine-hours:
24,000
23,500
What are the various overhead rates using the
three methods?
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Overhead Rates Direct Method
Assembly:
$3,290,000 ÷ $698,880 direct labor costs
= 471% of direct labor costs
Finishing:
$1,770,000 ÷ 23,500 = $75.32 per machine-hour
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Overhead Rates
Step-Down Method
Assembly:
$3,296,000 ÷ $698,880 direct labor costs
= 472% of direct labor cost
Finishing:
$1,764,000 ÷ 23,500 = $75.06 per machine-hour
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Overhead Rates Reciprocal
Assembly:
$3,263,400 ÷ $698,880 direct labor costs
= 467% of direct labor cost
Finishing:
$1,796,599 ÷ 23,500 = $76.45 per machine-hour
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
15 - 11
Comparison of Rates
Direct method:
Step-down method:
Reciprocal method:
Assembly Finishing
471%
$75.32
472%
$75.06
467%
$76.45
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Learning Objective 4
Allocate common costs
using either the stand-alone
or incremental method.
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Allocating Common Costs
Two methods for allocating common cost are:
1. Stand-alone cost
allocation method
2. Incremental cost
allocation method
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Stand-Alone Example
A consultant in Tampa is planning to go to
Chicago and meet with an international client.
The round-trip Tampa/Chicago/Tampa
airfare costs $540.
The consultant is also planning to attend
a business meeting with a North Carolina
client in Durham.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Stand-Alone Example
The round-trip Tampa/Durham/Tampa
airfare costs $360.
The consultant decides to combine the two
trips into a Tampa/Durham/Chicago/Tampa
itinerary that will cost $760.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Stand-Alone Example
How much should the consultant charge
to the North Carolina client?
$360 ÷ ($360 + $540) = .40
.40 × $760 = $304
How much to the international client?
$760 – $304 = $456
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Incremental Cost Example
Assume that the business meeting in Chicago
is viewed as the primary party.
What would be the cost allocation?
International client (primary)
$540
Durham client (incremental) $760 – $540 = $220
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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Learning Objective 5
Explain the importance of
explicit agreement between
contracting parties when
reimbursement is based
on costs incurred.
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Cost Allocation and Contracts
Many commercial contracts include clauses that
require the use of cost accounting information.
Contract disputes arise with some regularity,
often with respect to cost allocation.
Cost assignment rules should be as explicit as
possible (and in writing).
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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End of Chapter 15
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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