1
Cost allocation
5.
COST ALLOCATION................................................................................................ 1
5.1. SERVICE DEPARTMENT COST ALLOCATION .............................................. 1
5.1.1. Direct Method ................................................................................................. 4
5.1.2. Step-Down Method ......................................................................................... 4
Fixed versus Variable Costs........................................................................................ 6
5.1.3. Dual Cost Allocation....................................................................................... 7
5.1.4. Allocate Budgeted Costs ................................................................................. 9
5.2. New Manufacturing Environment ........................................................................ 10
5.3. JOINT PRODUCT COST ALLOCATION .......................................................... 11
5.3.1. Allocating Joint Costs ................................................................................... 11
Chapter summary ...................................................................................................... 12
5. COST ALLOCATION
After studying this chapter, you will be able to
1. Allocate service department costs using the direct method, step-down method, or
reciprocal-services method (appendix).
2. Use the dual approach to service department cost allocation
3. Explain the difference between two-stage cost allocation with departmental overhead
rates and activity-based costing (ABC).
4. Allocate joint costs among joint products using each of the following techniques:
physical-units method, relative-sales-value method, and net-realizable-value method.
This chapter is divided into two sections, each of which explores a particular costallocation topic in greater detail. The two sections, which may be studied separately,
cover the following topics: 1. service department cost allocation, joint product cost
allocation.
5.1. SERVICE DEPARTMENT COST ALLOCATION
A service department is a unit in an organization that is not involved directly in
producing the organization's goods or services. However, a service department does
provide a service that enables the organization's production process to take place. For
example, the Maintenance Department in an automobile plant does not make
automobiles, but if it did not exist, the production process would stop when the
manufacturing machines broke down. Thus, the Maintenance Department is crucial to the
production operation even though the repair personnel do not work directly on the plant's
products.
Service departments are important in nonmanufacturing organizations also. For example,
a hospital's Personnel Department is responsible for staffing the hospital with physicians,
nurses, lab technicians, and other employees. The Personnel Department never serves the
patients, yet without it the hospital would have no staff to provide! medical care.
A service department such as the Maintenance Department or the Personnel Department
must exist in order for an organization to carry out its primary function. Therefore, the
cost of running a service department is part of the cost incurred by the organization in
producing goods or services. In order to determine the cost of those goods or services, all
service department costs must be allocated to the production departments in which the
goods or services are produced. For this reason, the costs incurred in an automobile
2
Cost allocation
plant's Maintenance Department are allocated to all of the production departments that
have machinery. The costs incurred in a hospital's Personnel Department are allocated to
all of the departments that have personnel. Direct-patient-care departments, such as
Surgery and Physical Therapy, are allocated their share of the Personnel Department's
costs.
To see how service department cost allocation fits into the overall picture of product, it
may be helpful to review Exhibit 3-13. The exhibit shows three types of allocation
processes, as follows:
1. Cost distribution. Costs in various cost pools are distributed to all departments,
including both service and production departments.
2. Service department cost allocation. Service department costs are allocated to
production departments.
3. Cost application. Costs are assigned to the goods or services produced by the
organization.
It is the second type of allocation process listed above that we are focusing on now. The
context for our discussion is Riverside Clinic, an outpatient medical facility in
Philadelphia.
The clinic is organized into three service departments and two direct-patient-care
departments. Exhibit 18-1 displays a simple organization chart for Riverside Clinic. Since
the clinic is not a manufacturing organization, we refer to direct-patient-care departments
instead of production departments. These two departments, Orthopedics d Internal
Medicine, directly provide the health care that is the clinic's primary objective. Thus, the
clinic's direct-patient-care departments are like the production departments in a
manufacturing firm.
Notice that the Personnel Department and the Administration and Accounting department
provide services to each other. When this situation occurs, the two service departments
exhibit reciprocal services.
Exhibit 18-2 provides some of the details for our illustration of service department cost
allocation. Panel A shows the proportion of each service department's output that s
consumed by each of the departments using its services. Panel B shows the allocation
bases, which are used to determine the proportions shown in panel A. Further explanation
of the information in Exhibit 18-2 follows.
3
Cost allocation
Exhibit 13-1.
Patient Records. The service output of the Patient Records Department is consumed
only by the Orthopedics and Internal Medicine Departments. Annual patient load is the
allocation base used to determine that 30 percent of the Patient Records Department's
services were consumed by Orthopedics and 70 percent by Internal Medicine.
Personnel. The Personnel Department serves each of the clinic's other departments,
including the other two service departments and the two direct-patient-care departments.
The allocation base used to determine the proportions of the Personnel Department's
output consumed by the four using departments is the number of employees in the using
departments. For example, 5 percent of the clinic's employees (excluding those in the
Personnel Department) work in the Patient Records Department.
Exhibit 13-2.
Administration and Accounting. This service department provides services only to the
Personnel Department, the Orthopedics Department, and the Internal Medicine
Department. A variety of services are provided, such as computer support, patient billing,
and general administration. Since larger amounts of these services are provided to larger
using departments, departmental size is the allocation base used to determine the
proportion of service output consumed by each using department. Since the space
devoted to each department is a convenient measure of departmental size, square footage
is the measure used in Exhibit 18-2. For example, 5 percent of the clinic's space
(excluding that occupied by Administration and Accounting) is devoted to the Personnel
Department.
4
Cost allocation
Panel C of Exhibit 18-2 shows the total budgeted cost of each service department that is
to be allocated among the using departments.
There are two widely used methods of service department cost allocation, the direct
method and the step-down method. These methods are discussed and illustrated next,
using the data for Riverside Clinic.
5.1.1. Direct Method
Under the direct method, each service department's costs are allocated among only the
direct-patient-care departments that consume part of the service department's output. This
method ignores the fact that some service departments provide services to other service
departments. Thus, even though Riverside Clinic's Personnel Department provides
services to two other service departments, none of its costs are allocated to those
departments. Exhibit 18-3 presents Riverside Clinic's service department cost allocations
under the direct method.
Exhibit 18-3
Notice that the proportion of each service department's costs to be allocated to each
direct-patient-care department is determined by the relative proportion of the service
department's output consumed by each direct-patient-care department. For example, a
glance at Exhibit 18-2 shows that the Personnel Department provides 25 percent of its
services to Orthopedics and 50 percent to Internal Medicine. Summing these two
percentages yields 75 percent. Thus, 25/75 is the fraction of Personnel's cost allocated to
Orthopedics and 50/75 is the fraction allocated to Internal Medicine.
5.1.2. Step-Down Method
As stated above, the direct method ignores the provision of services by one service
department to another service department. This shortcoming is overcome partially by the
step-down method of service department cost allocation. Under this method, the
managerial accountant first chooses a sequence in which to allocate the service
departments' costs. A common way to select the first service department in the sequence
is to choose the one that serves the largest number of other service departments. The
service departments are ordered in this manner, with the last service department being the
one that serves the smallest number of other service departments. 3 Then the managerial
accountant allocates each service department's costs among the direct-patient-care
departments and all of the other service departments that follow it in the sequence. Note
5
Cost allocation
that the ultimate cost allocations assigned to the direct-patient-care departments will
differ depending on the sequence chosen.
The step-down method is best explained by way of an illustration. Riverside Clinic's
Personnel Department serves two other service departments: Patient Records, and
Administration and Accounting. The Administration and Accounting Department serves
only one other service department: Personnel. Finally, the Patient Records Department
serves no other service departments. Thus, Riverside Clinic's service department
sequence is as follows: Personnel (1), Administration and Accounting (2), Patient
Records (3).
In accordance with this sequence, each service department's costs are allocated to the
other departments as follows:
Cost Allocated from This Service Department
To These Departments
Personnel
Administration and Accounting
Patient Records
Orthopedics
Internal Medicine
Administration and Accounting
Orthopedics
Internal Medicine
Patient Records
Orthopedics
Internal Medicine
Notice that even though Administration and Accounting serves Personnel, there is no cost
allocation in that direction. This results from Personnel's placement before
Administration and Accounting in the allocation sequence. Moreover, no costs are
allocated from Patient Records to either of the other service departments, because Patient
Records does not serve those departments.
Exhibit 18-4 presents the results of applying the step-down method at Riverside Clinic.
First, the Personnel Department's $60,000 in cost is allocated among the four departments
using its services. Second, the cost of the Administration and Accounting Department is
allocated. The total cost to be allocated is the department's original $190,000 plus the
$12,000 allocated from the Personnel Department. The new total of $202,000 is allocated
to the Orthopedics and Internal Medicine Departments according to the relative
proportions in which these two departments use the services of the Administration and
Exhibit 18-4
Accounting Department. Finally, the Patient Records Department's cost is allocated.
6
Cost allocation
Fixed versus Variable Costs
In our allocation of Riverside Clinic's service department costs, we did not distinguish
between fixed and variable costs. Under some circumstances, this simple approach can
result in an unfair cost allocation among the using departments. To illustrate, we will use
the data about Riverside Clinic's fixed and variable costs given in panel C of Exhibit 182. Consider the cost data for the Patient Records Department, which serves only the
Orthopedics and Internal Medicine departments. Under the direct method of service
department cost allocation, the Patient Records Department’s costs were allocated as
follows:
The allocation base used in this cost allocation is the annual patient load in the
Orthopedics and Internal Medicine departments. Let's assume the following patient loads
in 19x8, the year for which the cost allocation has been done.
Department
Patient Load
Proportion of Total
Orthopedics
30,000
(80, 000/100, 000) = 3/10
Internal Medicine
70,000
(70, 000/100, 000) = 7/10
Total
100,000
Now suppose the projections for 19x9 are as follows:
Department
Projected Patient Load
Projected Proportion of
Total
Orthopedics
30,000
(30,000/80,000) = 3/8
Internal Medicine
50,000
(50,000/80,000) = 5/8
Total
80,000
Department
Patient Records
Budgeted Variable
Cost
$19,200
Budgeted Fixed
Cost
$76,000
Budgeted Total Cost
$95,200
7
Cost allocation
The projections for 19x9 include a stable patient load in the Orthopedics Department but
a decline in the patient load of the Internal Medicine Department. Since the projected
total patient load is lower for 19x9, the projected variable cost in the Patient Records
Department is lower also.
What will be the effect of these changes on the 19x9 allocation of the Patient Records
Department's costs? Using the direct method, we obtain the following allocation.
Cost Allocation for 19x9: Direct Method
Patient Records
Variable cost
$ 19,200
Fixed cost
76,000
Total Cost
$95,200
Orthopedics
($95,200)/(3/8)=$35.700
Internal Medicine
($95,200)/(5/8)=$59.500
Compare the costs allocated to the two direct-patient-care departments in l9x8 and 19x9.
Notice that the cost allocated to the Orthopedics Department increased by $5,700 (from
$30,000 to $35,700), even though Orthopedics' patient load is projected to remain
constant. What has happened here? The projected decline in the Internal Medicine
Department's volume resulted in lower budgeted variable costs for the Patient Records
Department, but the budgeted fixed costs did not change. At the same time, the lower
projected patient load in Internal Medicine resulted in a higher pro- portion of the total
projected patient load for Orthopedics (from 3/10 in 19x8 up to 3/8 in 19x9). As the
following analysis shows, this results in an increased allocation of fixed costs to the
Orthopedics Department in 19x9.
19x8
19x9
Fixed cost in Patient Records Department
$76,000
$76,000
Orthopedics Department's proportion of total patient
x 3/10
x 3/8
load
Orthopedics Department's allocation of fixed cost
$22,800
$28,500
Difference
$5,700
This difference of $5,700 is equal to the increase in the Orthopedics Department's total
cost allocation from the Patient Records Department in 19x9.
To summarize, the projected decline in Internal Medicine's l9x9 patient load will result in
an increased cost allocation from the Patient Records Department to the Orthopedics
Department in 19x9. The cause of this increased allocation is our failure to distinguish
between fixed and variable costs in the allocation process.
5.1.3. Dual Cost Allocation
The problem illustrated in the preceding section can be resolved by allocating fixed and
variable costs separately. This approach, called dual-cost allocation, works with either the
direct method or the step-down method of allocation. Under dual cost allocation, variable
8
Cost allocation
costs are allocated on the basis of short- run usage of the service department's output;
fixed costs are allocated on the basis of long-run average usage of the service
department's output. The rationale for this approach is that fixed costs are capacityproducing costs. When service departments are established, their size and scale usually
are determined by the projected long-run needs of the using departments. To illustrate
dual cost allocation for Riverside Clinic, we need estimates of the long-run average usage
of each service department's output by each using department. These estimates are given
in Exhibit 18-5.
Exhibit 18-5.
To combine the dual-allocation approach with either the direct method or the step- own
method, we simply apply the allocation method twice, as follows:
Costs to Be Allocated
Basis for Allocation
Allocation Method
Variable costs in 19x8
Short-run usage in 19x8
Direct
Step-down
method
method
(Exhibit 18-2, panel C)
(Exhibit 18-2, panel A)
OR
Fixed costs in 19x8
Long-run average usage
Direct
Step-down
method
method
(Exhibit 18-2, panel C)
(Exhibit 18-5)
Exhibit 18-6
After both of these allocation procedures have been completed, the resulting variableand fixed-cost allocations for each direct-patient-care department are summed. Exhibit
18-6 presents the allocation computations when the dual approach is combined with the
direct method. Compare the final direct allocations with those in Exhibit 18-3, where the
dual approach was not used. Notice that the final allocations are different. Exhibit 18-7
presents the computations for the step-down method. Compare the final step-down
allocations with those in Exhibit 18-4, where the dual approach was not used. Again, the
final allocations are different.
9
Cost allocation
A Behavioral Problem Dual cost allocation prevents a change in the short-run activity of
one using department from affecting the cost allocated to another using department.
However, the approach sometimes presents a problem of its own. In order to implement
the technique, we need accurate projections of the long-run average usage of each service
department's output by each using department. This is the information in Exhibit 18-5.
Typically, these estimates come from the managers of the departments that consume the
services. The problem is that the higher a manager's estimate of the department's long-run
average usage is, the greater will be the department's allocation of fixed service
department costs. This creates an incentive for using-department managers to understate
their expected long-run service needs. Ultimately, such understatements can result in
building service facilities that are too small.
How can we prevent this behavioral problem? First, we can rely on the professionalism
and integrity of the managers who provide the estimates. Second, we can reward
managers through promotions and pay raises for making accurate estimates of their
departments' service needs.
Exhibit18-7.
5.1.4. Allocate Budgeted Costs
When service department costs are allocated to production departments, such as the
direct-patient-care departments of Riverside Clinic, budgeted service department costs
10
Cost allocation
should be used. If actual costs are allocated instead, any operating inefficiencies in the
service departments are passed along to the using departments. This reduces the incentive
for service department managers to control the costs in their departments. The proper
approach is as follows:
1. Compare budgeted and actual service department costs and compute any variances.
2. Use these variances to help control costs in the service departments.
3. Close out the service department cost variances against the period's income.
4. Allocate the service departments' budgeted costs to the departments that directly
produce goods or services.
5.2. New Manufacturing Environment
In traditional manufacturing environments, service department costs are allocated to
production departments to ensure that all manufacturing costs are assigned to products.
For example, the costs incurred in a machine-maintenance department typically are
allocated to the other service departments and the production departments that use
maintenance services. Service department cost allocation continues to be used in the new
manufacturing environment, characterized by the JIT philosophy and CIM systems.
However, the extent of such allocations is diminished in advanced manufacturing
systems, because more costs are directly traceable to product lines. In a flexible
manufacturing, system, almost all operations are performed in the FMS cell. Even
machine maintenance is done largely by the FMS cell operators rather than a separate
maintenance department. Inspection often is performed by FMS cell operators,
eliminating the need for a separate inspection department. In short, as more and more
costs become directly traceable to products, the need for allocation of indirect costs
declines.
The Rise of Activity-Based Costing
Service department cost allocation is one type of allocation procedure used in two-stage
allocation with departmental overhead rates. (See Exhibit 3-13 on page 88). Under this
approach, costs first are distributed to departments; then they are allocated from service
departments to production departments. Finally, they are assigned from production
departments to products or services. Departments play a key role as intermediate cost
objects under this approach.
In an activity-based costing (ABC) system, on the other hand, the key role is played by
activities, not departments. (See Exhibit 3-14 on page 89). First, the costs of various
activities are assigned to activity cost pools; then these costs are assigned to products or
services.
The breakdown of costs by activity in an ABC system is much finer than a breakdown by
departments. For example, under the service department cost allocation approach, the
Purchasing Department might be one of the service departments identified. However,
under ABC, the various activities engaged in by purchasing personnel would be
separately identified. Activities such as part specification, vendor identification, vendor
selection, price negotiation, ordering, expediting, receiving, inspection, and invoice
paying might be identified separately under ABC. Then the costs of each of these
activities would be assigned to products or services on the basis of the appropriate cost
drivers. The ABC approach generally will provide a much more accurate cost for each of
the organization's products or services.
11
Cost allocation
5.3. JOINT PRODUCT COST ALLOCATION
A joint production process results in two or more products, which are termed joint
products. The cost of the input and the joint production process is called a joint product
cost. The point in the production process where the individual products become
separately identifiable is called the split-off point. To illustrate, International Chocolate
Company produces cocoa powder and cocoa butter by processing cocoa beans in the joint
production process depicted in Exhibit 18-8.
As the diagram shows, cocoa beans are processed in 1 -ton batches. The beans cost $500
and the joint process costs $600, for a total joint cost of $ 1, 100. The process results in
1,500 pounds of cocoa butter and 500 pounds of cocoa powder. Each of these two joint
products can be sold at the split-off point or processed further. Cocoa butter can be
separately processed into a tanning cream, and cocoa powder can be separately processed
into instant cocoa mix.
5.3.1. Allocating Joint Costs
For product-costing purposes, a joint product cost usually is allocated to the joint
products that result from the joint production process. Such allocation is necessary for
inventory valuation and income determination, among other reasons. There are three
commonly used methods for allocating joint product costs. Each of these is explained
next.
Exhibit 18-8
Physical-Units Method The physical-units method allocates joint product costs on the
basis of some physical characteristic, of the joint products at the split-off point. Panel A
of Exhibit 18-9 illustrates this allocation method for International Chocolate Company
using the weight of the joint products as the allocation basis.
Relative-Sales-Value Method The relative-sales-value method is based on the relative
sales value of each joint product at the split-off point. In the International Chocolate
Company illustration, these joint products are cocoa butter and cocoa powder. This
method is illustrated in Exhibit 18-9 (panel B).
Net-Realizable-Value Method Under the net-realizable-value method, the relative value
of the final products is used to allocate the joint cost. International Chocolate Company's
12
Cost allocation
final products are tanning cream and instant cocoa mix. The net realizable value of each
final product is its sales value less any separable costs incurred after the split-off point.
The joint cost is allocated according to the relative magnitudes of the final products' net
realizable values. Panel C of Exhibit 18-9 illustrates this allocation method. Notice how
different the cost allocations are under the three methods, particularly the physical-units
method. Since the physical-units approach is not based on the economic characteristics of
the joint products, it is the least preferred of the three methods.
Exhibit 18-9
By-Products A joint product with very little value relative to the other joint products is
termed a by-product. For example, whey is a by-product in the production of cheese. A
common practice in accounting is to subtract a by-product's net realizable value from the
cost of the joint process. Then the remaining joint cost is allocated among the major joint
products. An alternative procedure is to inventory the by-product at its sales value at
split- off. Then the by-product's sales value is deducted from the production cost of the
main products.
Chapter summary
SERVICE DEPARTMENT COST ALLOCATION: A GENERAL OVERVIEW
Service departments are not directly involved in making a product but instead provide
support to manufacturing departments. Support departments also exist in
13
Cost allocation
nonmanufacturing organizations to aid units that furnish "end-product" services to
consumers. Examples include personnel, cost accounting, custodial, cafeteria, and
administration.Service departments are necessary for production to take place or for the
nonmanufacturer's "end-product" to be created. Accordingly, their costs are handled in
the
following
manner:
a. Cost distribution--All costs are distributed among the appropriate departments.
b. Service department cost allocation --The costs of service departments are allocated
to producing departments for which support is provided. The amounts allocated should be
budgeted costs, not actual costs, because use of the latter will result in service department
inefficiencies
being
passed
along
to
users.
c. Cost application--Costs are assigned to the goods or services made in the producing
departments.
2. METHODS OF SERVICE DEPARTMENT COST ALLOCATION
The direct method is the most straightforward method of service department cost
allocation. Costs are allocated only to producing departments based on relative
consumption
of
the
service.
a. Consumption of the service is linked to the producing department by some causal
measure. For example, the cost of buildings and grounds may be charged to producing
departments
based
on
the
departments'
square
footage.
b. A drawback is that no allocation is made to other service departments that consume the
service.
The step-down method overcomes the limitation of the direct method, with allocations
occurring to both producing departments and other service departments. In other words,
this method recognizes that service departments provide service to producing
departments as well as to other service departments. Under this method:
a. Allocations generally begin with the service department that serves the greatest
number
of
other
service
departments.
b. The allocation is step-down in nature; that is, once a department's costs are allocated,
no costs are recirculated back to that department. Because of this feature, it is possible
that a department could provide service to another department and that second
department would not be charged.The preceding problem is addressed by the reciprocalservices method (see appendix). Under this approach, all service and producing
department relationships are recognized and costs are allocated accordingly by the use of
simultaneous linear equations.
3. DUAL-COST ALLOCATION
Under the direct and step-down methods, departmental costs (i.e., variable and fixed)
may be combined and allocated to other departments on a "lump-sum" basis. Although
simplistic, one department's usage of a service can wind up affecting the cost that is
allocated
to
a
totally
different
department.
Under another approach, the dual-cost method, variable and fixed costs are allocated to
departments separately by the use of different allocation bases. Variable costs are often
charged based on short-term usage and fixed costs are charged based on long-term
average usage. Since many fixed-cost items deal with providing a company's
manufacturing capacity (i.e., long-term average production needs), it is sensible to
allocate
the
cost
in
this
manner.
For example, assume that a company is considering the installation of a new computer
14
Cost allocation
system based on the long-run estimated needs predicted by all the departments. Once the
system is installed, the fixed costs should be allocated on the relative proportion of longterm usage previously predicted. Otherwise, a short-run dip in usage by one department
would shift the capacity costs unfairly to the remaining departments even though their
usage
had
remained
constant.
A potential behavioral problem could arise, as managers may attempt to understate
estimates of long-term usage when figuring allocations of fixed costs. (The lower the
estimate, the lower the allocation.) Because of misleading or "bad" information, such a
practice may also result in the acquisition of inadequate long-term resource capacity.
4. THE NEW MANUFACTURING ENVIRONMENT
Service department cost allocations are less significant in the new manufacturing
environment because more costs are directly traceable to product lines. Even machine
maintenance in a flexible manufacturing system (FMS) is often performed by the FMS
cell operators rather than a separate maintenance department.
Accounting for service department costs is somewhat similar to the procedures that occur
in an activity-based costing (ABC) system. A two-stage allocation takes place with
service department costs. Costs are first assigned to production departments and then to
products or services. With ABC, the costs of various activities are assigned to activity
cost pools and then to products and services. ABC takes an activity orientation rather
than a departmental orientation.
5. JOINT PRODUCT COST ALLOCATION
Joint products are made in a process when two or more products emerge from a single
manufacturing process (e.g., kerosene and gasoline in the petroleum industry). The point
in the production process at which the products are distinguishable from one another is
called
the
split-off
point.
An allocation process is needed at the split-off point to allocate the joint process cost
incurred among the individual products. Such allocation is necessary for inventory
valuation and income determination purposes. Several different methods are available.
Under the physical-units method, joint cost is allocated based on the physical quantities
(units, pounds, gallons, and so forth) that emerge from the process. The drawback to this
method is that the joint cost per unit in every product line will be identical.
With the relative-sales-value method, joint cost is allocated based on the sales dollars
that could be received for the products at the split-off point. This approach is based on the
fact
that
the
products
are
salable
at
split.
The net-realizable-value method is a variation of the relative-sales-value method, but it
backs into a "value" at split-off when no market exists at that point. Net realizable value
is computed by taking a product's selling price and subtracting any separable costs
incurred after split-off.
Key terms
by-product - jont product with very little value relative to the other joint products.
direct method (of preparing the statement of cash flows) - method of preparing the
operating activities section of a statement of cash flows. A cash-basis income statement is
constructed in which operating cash disbursements are subtracted from operating cash
receipts.
dual cost allocation - approach to service department cost allocation in which variable
15
Cost allocation
costs are allocated in proportion to short-term usage and fixed costs are allocated in
proportion
to
long-term
usage.
joint production process - production process that results in two or more joint products.
joint
products
-The
outputs
of
a
joint
production
process.
net realizable value - A joint product's final sales value less any separable costs incurred
after
the
split-off
point.
net-realizable-value method - A method in which joint costs are allocated to the joint
products in proportion to the net realizable value of each joint product.
physical-units method - A method in which joint costs are allocated to the joint products
in
proportion
to
their
physical
quantities.
reciprocal service - The mutual provision of service by two service departments to each
other.
reciprocal-services method - A method of service department cost allocation which
accounts for the mutual provision of reciprocal services among all service departments.
relative sales value method - A method in which joint costs are allocated to the joint
products in proportion to their total sales values at the split-off point.
service departments – Subunits in an organization that are not involved directly in
producing
the
organization's
output
of
goods
or
services.
service department cost allocation - The second step in assigning manufacturingoverhead costs. All costs associated with a service department are assigned to the
departments
that
use
the
services
it
produces.
split-off point - The point in a joint production process at which the joint products
become
identifiable
as
separate
products.
step-down method - A method of service department cost allocation in which service
department costs are allocated first to service departments and then to production
departments.