Allocation of Support Department
Costs, Common Costs, and Revenues
Chapter 15
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
15 - 1
Learning Objective 1
Differentiate the single-rate
from the dual-rate
cost-allocation method.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
15 - 2
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.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
15 - 3
Learning Objective 2
Understand how the uncertainty
user managers face is affected
by the choice between budgeted
and actual cost-allocation rates.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
15 - 4
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?
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
15 - 5
Budgeted versus Actual Rates
– because the user departments do not pay for
any costs that exceed the budgeted rates
When actual rates are used for cost allocation,
managers do not know the rates to be used
until the end of the budget period.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
15 - 6
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.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
15 - 7
Learning Objective 3
Allocate support department costs
using the direct, step-down,
and reciprocal methods.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
15 - 8
Allocating Support
Departments Costs
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.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
15 - 9
Allocating Support
Departments Costs
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.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
15 - 10
Allocating Support
Departments Costs
The Canton Division of Smith Corporation has two
operating departments and two support departments.
Assembly
and
Finishing
Maintenance
and
Human Resources
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
15 - 11
Allocating Support
Departments Costs
Total square feet = 255,000
Total number of employees = 95
Maintenance is allocated using square feet.
Human Resources is allocated using
number of employees.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
15 - 12
Allocating Support
Departments Costs
Maintenance
Budgeted costs
before allocations:
$300,000
Square feet:
5,000
Number of employees:
8
Human
Resources
$2,160,000
30,000
15
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
15 - 13
Allocating Support
Departments Costs
Assembly
Budgeted costs
before allocations:
$1,700,000
Square feet:
110,000
Number of employees:
48
Finishing
$900,000
110,000
24
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
15 - 14
Direct Method
Support Departments
Maintenance
$300,000
0%
Operating Departments
110/220
$1,700,000
Assembly
24/72
$900,000
Finishing
0%
Human
Resources
$2,160,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
15 - 15
Direct Method
Support Departments
Maintenance
$300,000
0%
Operating Departments
$150,000
$1,700,000
Assembly
$720,000
$900,000
Finishing
0%
Human
Resources
$2,160,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
15 - 16
Direct Method
Original costs:
Maintenance Allocated:
Human Resources
Allocated:
Total
Assembly
$1,700,000
150,000
Finishing
$ 900,000
150,000
1,440,000
$3,290,000
720,000
$1,770,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
15 - 17
Step-Down Method
Which support department should be allocated first?
Maintenance provides 12% of its services
to Human Resources.
Human Resources provides 10% of its
services to Maintenance.
Maintenance to Human Resources:
30,000 ÷ 250,000 (or 12%) × $300,000 = $36,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
15 - 18
Step-Down Method
Maintenance to Assembly:
110,000 ÷ 250,000 (or 44%) × $300,000 = $132,000
Maintenance to Finishing:
110,000 ÷ 250,000 (or 44%) × $300,000 = $132,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
15 - 19
Step-Down Method
Maintenance:
Human Resources:
Assembly:
Finishing:
Costs before
allocation
$ 300,000
$2,160,000
$1,700,000
$ 900,000
Allocated
costs
($300,000)
$ 36,000
$132,000
$132,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
15 - 20