Chapter 15
Allocation of:
Support Department Costs,
Common Costs, and
Revenues
2009 Foster School of Business
Cost Accounting
L.DuCharme
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Overview
• Allocation of support department costs
– Example of 3 ways
• Allocation of Common Costs
– Example of 2 ways
• Allocation of Revenues from Bundled
products/services
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Cost Accounting
L.DuCharme
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Operating vs. Support
Departments
An operating department (a production
department in manufacturing companies)
adds value to a product or service.
A support department (service department)
provides the services that assist other operating
and support departments in the organization.
2009 Foster School of Business
Cost Accounting
L.DuCharme
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Single-Rate and
Dual-Rate Methods
The single-rate cost allocation method
pools together all costs in a cost pool.
The dual-rate cost allocation method
classifies costs in each cost pool into
two cost pools: a variable-cost cost
pool and a fixed-cost cost pool.
2009 Foster School of Business
Cost Accounting
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Budgeted versus Actual Rates
Budgeted rates let the user department know in
advance the cost rates they will be charged.
During the budget period, the supplier department,
not the user departments, bears the risk of any
unfavorable cost variances.
Why?
2009 Foster School of Business
Cost Accounting
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Budgeted versus Actual
Usage Allocation Bases
Organizations commit to infrastructure costs on
the basis of a long-run planning horizon.
The use of budgeted usage to allocate these fixed
costs is consistent with the long-run horizon.
Typically, you use actual usage to allocate
variable costs.
2009 Foster School of Business
Cost Accounting
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Allocating Support
Departments Costs—3 methods
Direct method:
Allocates support department costs to operating
departments only.
Step-down (sequential allocation) method:
Allocates support department costs to other support
departments and to operating departments.
Reciprocal allocation method:
Allocates costs by services provided among all
support departments.
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Cost Accounting
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Allocating Support
Departments Costs—in-class example
Larry’s Tractors, Inc. has two
support departments and two operating departments.
Maintenance
and
Legal
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Cost Accounting
Implements
and
Engines
L.DuCharme
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Allocating Support
Departments Costs (do in class)
Budgeted Capacity
To be supplied by:
Maintenance
Legal
Maintenance
Legal
10%
.
Implements Engines
40%
60%
5%
Actual Usage
Supplied by:Maintenance
Maintenance
Legal
Legal
10%
10%
Implements Engines
30%
70%
50%
35%
.
60%
20%
Actual costs were:
Maintenance
Legal $ 75,000
Fixed
$100,000
$ 20,000
Variable
$ 72,000
Fixed costs are allocated on the basis of budgeted capacity.
Variable costs are allocated on the basis of actual usage.
The direct method is used to allocate service department costs to operating departments.
Also do this problem assuming the step-down/dual and then the reciprocal/dual methods.
* In other problems, always remember to ignore self service.
2009 Foster School of Business
Cost Accounting
L.DuCharme
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Allocating Common Costs
Two methods for allocating common costs are:
1. Stand-alone cost
allocation method
2009 Foster School of Business
Cost Accounting
2. Incremental cost
allocation method
L.DuCharme
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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.
2009 Foster School of Business
Cost Accounting
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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.
2009 Foster School of Business
Cost Accounting
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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
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Cost Accounting
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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
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Cost Accounting
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Revenues and Bundled Products
A bundled product is a package of two or more
products (or services) sold for a single price.
Bundled product sales are also referred to
as “suite sales.”
The individual components of the bundle also
may be sold as separate items at their own
“stand-alone” prices.
2009 Foster School of Business
Cost Accounting
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Revenues and Bundled Products
What businesses provide bundled products?
Banks
Checking
 Safety
deposit boxes
 Investment
advisory

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Hotels
Lodging
 Food and
beverage
services
 Recreation

Cost Accounting
L.DuCharme
Tours
Transportation
 Lodging
 Guides

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Allocation of Revenues
Allocation of the revenues of a
bundled package to the
individual products in that
package is similar to allocation
of common costs.
2009 Foster School of Business
Cost Accounting
L.DuCharme
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End of Chapter 15
2009 Foster School of Business
Cost Accounting
L.DuCharme
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