CHAPTER 6support department cost allocation
questions for writing and discussion
1
1.Stage one assigns service costs to producing departments. Costs are assigned using factors that reflect the consumption of the services by each producing department. Stage two allocates the costs assigned to the producing departments (including service costs and direct costs) to the products passing through the producing departments.
2.Service costs are part of the cost of producing a product. Knowing the individual product costs is helpful for developing bids and cost-plus prices.
3.GAAP requires that all manufacturing costs be assigned to products for inventory valuation.
4.Allocation of service costs makes users pay attention to the level of service activity being consumed and also provides an incentive for them to monitor the efficiency of the service departments.
5.Without any allocation of service costs, users may view services as a free good and consume more of the service than is optimal. Allocating service costs would encourage managers to use the service until such time as the marginal cost of the service is equal to the marginal benefit.
6.Since the user departments are charged for the services provided, they will monitor the performance of the service department. If the service can be obtained more cheaply externally, then the user departments will be likely to point this out to management. Knowing this, a manager of a service department will exert effort to maintain a competitive level of service.
7.The identification and use of causal factors ensures that service costs are accurately assigned to users. This increases the legitimacy of the control function and enhances product-costing accuracy.
8.Allocating actual costs passes on the efficiencies or inefficiencies of the service department, something which the manager of the producing department cannot control. Allocating budgeted costs avoids this problem.
9.Variable costs should be allocated according to usage, whereas fixed costs should be allocated according to capacity. Variable costs are based on usage because, as a department’s usage of a service increases, the variable costs of the service department increase. A service department’s capacity and the associated fixed costs were originally set by the user departments’ capacities to use the service. Thus, each department should receive its share of fixed costs as originally conceived (to do otherwise allows one department’s performance to affect the amount of cost assigned to another department).
10.Normal or peak capacity measures the original capacity requirements of each producing department. It is used when one department’s spike in usage affects the amount of capacity needed.
11.Using variable bases to allocate fixed costs allows one department’s performance to affect the costs allocated to other departments. Variable bases also fail to reflect the original consumption levels that essentially caused the level of fixed costs.
12.The dual-rate method separates the fixed and variable costs of providing services and charges them separately. In effect, a single rate treats all service costs as variable. This can give faulty signals regarding the marginal cost of the service. If all costs of the service department were variable, there would be no need for a dual rate. In addition, if original capacity equaled actual usage, the dual-rate method and the single-rate method would give the same allocation.
13.The direct method allocates the direct costs of each service department directly to the producing departments. No consideration is given to the fact that other service centers may use services. The sequential method allocates service costs sequentially. First, the costs of the center providing the greatest service are allocated to all user departments, including other service departments. Next, the costs of the second greatest provider of services are allocated to all user departments, excluding any department(s) that have already allocated costs. This continues until all service center costs have been allocated. The principal difference in the two methods is the fact that the sequential method considers some interactions among service centers, and the direct method ignores interactions.
14.Agree. The reciprocal method is more accurate because it fully considers interactions among service centers.
1
Exercises
6–1
1
a.producing
b.support
c.support
d.support
e.support
f.producing
g.producing/support
h.producing
i.producing
j.support
k.support
l.support
m.producing
n.producing
o.support
1
6–2
1
a.support
b.support
c.producing
d.producing
e.producing
f.support
g.support
h.producing
i.producing
j.support
1
6–3
a.Number of employees
b.Square footage
c.Pounds of laundry
d.Orders processed
e.Maintenance hours worked
f.Number of employees
g.Number of transactions processed
h.Machine hours
i.Square footage
6–4
1.Dr. Poston may want to cost the cleanser for several reasons: to value inventory; to determine profitability; and to plan sales and costs for the coming year. As long as he sells relatively few bottles of cleanser, it is not necessary to allocate any indirect costs to the cleanser. The medical assistant is paid the same amount whether she mixes the cleanser or not. The space used to store the cleanser materials is small, and the incremental cost is zero.
2.The situation has changed dramatically. Now, the cleanser should be allocated some of the office rent as well as all of the new assistant’s salary. The office rent could be apportioned 75 percent to the three doctors and 25 percent to the cleanser bottling operation given that the cleanser operation takes an office and an examining room. It could be argued that this overstates the allocation to the cleanser, since the waiting room area does not serve the cleanser. However, the receptionist probably takes calls and opens mail for this project, so overstating the rent may be an easy way to adjust for this. The cost per bottle would then be:
Materials$0.50
Labor ($12,000/40,000)0.30
Office rent*0.38
Total cost$1.18
*Office rent allocation = [($5,000 12)/4]/40,000 bottles
6–5
1.The incremental method of allocating the cost of the trip would result in a cost to LaTisha of $125 ($10 times five nights for the rollaway and $75 for her food).
2.The benefits-received approach could result in the following cost allocation to LaTisha:
Motel ($425/3)$141.67
Food75.00
Gas ($50/3) 16.67
Total$233.34
The treatment of the motel cost is problematical. This computation adds the rollaway cost for five nights to the cost of the double room for five nights. However, if LaTisha spends the entire time on a (less comfortable) rollaway, she may be less than pleased. Perhaps the vacationers could trade off sleeping on the rollaway.
6–6
1.Single charging rate= ($2,500/1,000) + $0.50
= $3 per gift
NumberCharging
Storeof GiftsRate=Total
Candles, Etc.170$3$510
Dream Weaver Gift Shoppe3103930
Back-in-the-Saddle Westernwear2403720
Cuppa Java Gourmet Coffees10330
Shoe You503150
Dana’s Sportswear2003600
Penelope’s Secret45031,350
Total1,430$4,290
2.NumberAllocated
Storeof GiftsPercentFixed Amount*
Candles, Etc.20020$ 500
Dream Weaver Gift Shoppe30030750
Back-in-the-Saddle Westernwear10010250
Cuppa Java Gourmet Coffees707175
Shoe You505125
Dana’s Sportswear13013325
Penelope’s Secret15015 375
Total1,000100$2,500
*Allocated fixed amount = Percent $2,500
Variable rate = $0.50 per gift
NumberVariableFixedTotal
Storeof GiftsAmount+Amount=Charge
Candles, Etc.170$85$500$585
Dream Weaver Gift Shoppe310155750905
Westernwear Back-in-the-Saddle240120250370
Cuppa Java Gourmet Coffees105175180
Shoe You5025125150
Dana’s Sportswear200100325425
Penelope’s Secret450225375600
Total1,430$715$2,500$3,215
6–6Concluded
3.The shops which actually use the gift-wrapping service less than anticipated would like the single charging rate. The single charging rate assigns less of the fixed cost to the shops using less of the service. Cuppa Java Gourmet Coffees originally anticipated having 70 gifts wrapped per month but actually had only 10 gifts wrapped. Under the single charging rate, Cuppa Java pays only $30; under the dual charging rate, Cuppa Java pays $180.
The dual charging rate method is preferred by shops which use the service as much as or more than anticipated. Penelope’s Secret had a much greater use for the service and would be charged $600 under the dual rate but $1,350 under the single rate.
4.Irrespective of the charging rate method, James may be overcharging by overestimating his fixed costs. The space used by the gift-wrapping service is one of five vacant spaces. The opportunity cost of using it to wrap gifts is zero. Until the eleventh space is rented and there is an occupant for the twelfth, perhaps the fixed cost should include only the salary of the wrapper.
6–7
1.Allocation ratios:
Year 1Year 2
Department A0.400.50
Department B0.600.50
Allocation:
Department A$48,000$60,000
Department B72,00060,000
2.The manager of Department B is not controlling maintenance costs better than the manager of Department A. The only reason that Department A’s allocation of maintenance cost increased is because Department B’s usage decreased.
3.First, variable and fixed costs should be allocated separately. Second, budgeted (not actual) costs should be allocated. Variable costs should be assigned to the two user departments by multiplying the budgeted variable cost per hour by the actual hours or budgeted hours used, depending on whether the purpose is performance evaluation or product costing. Fixed costs would be assigned in proportion to the practical or normal activities of each user department.
6–8
1.Product costing (Year 1 and Year 2 are identical):
Department ADepartment B
Variable costs:
($0.25 20,000)$5,000
($0.25 20,000)$5,000
Fixed costs:
(0.50 $100,000)50,000
(0.50 $100,000)50,000
Total cost$55,000$55,000
2.Performance evaluation:
Year 1
Department ADepartment B
Variable costs:
($0.25 24,000)$6,000
($0.25 36,000)$9,000
Fixed costs:
(0.50 $100,000)50,000
(0.50 $100,000)50,000
Total cost$56,000$59,000
Year 2
Department ADepartment B
Variable costs:
($0.25 25,000)$6,250
($0.25 25,000)$6,250
Fixed costs:
(0.50 $100,000)50,000
(0.50 $100,000)50,000
Total cost$56,250$56,250
6–9
1.Allocation ratios:
TraditionalGel
Machine hours0.25000.7500
Square feet0.60000.4000
No. of employees0.56250.4375
Cost assignment:
Power:
(0.2500 $90,000)$22,500
(0.7500 $90,000)$67,500
General Factory:
(0.6000 $300,000)180,000
(0.4000 $300,000)120,000
Personnel:
(0.5625 $120,000)67,500
(0.4375 $120,000)52,500
Direct costs137,500222,500
Total$407,500$462,500
2.Departmental overhead rates:
Traditional:$407,500/8,000= $50.94* per MHr
Gel:$462,500/24,000= $19.27* per MHr
*Rounded
6–10
1.Assume the support department costs are allocated in order of highest to lowest cost: General Factory, Personnel, and Maintenance.
General
PowerFactoryPersonnelTraditionalGel
Square feet0.15—0.100.450.30
No. employees0.20——0.450.35
Machine hours———0.250.75
General
PowerFactoryPersonnelTraditionalGel
Direct costs$ 90,000 $ 300,000 $120,000 $137,500 $222,500
General Factory:
(0.15)($300,000) 45,000 (45,000)
(0.10)($300,000) (30,000) 30,000
(0.45)($300,000) (135,000) 135,000
(0.30)($300,000) (90,000) 90,000
Personnel:
(0.20)($150,000) 30,000 (30,000)
(0.45)($150,000) (67,500) 67,500
(0.35)($150,000) (52,500) 52,500
Power:
(0.25)($165,000) (41,250) 41,250
(0.75)($165,000) (123,750) 123,750
Total$ 0$ 0$ 0 $381,250 $488,750
2.Traditional:$381,250/8,000= $47.66* per MHr
Gel:$488,750/24,000= $20.36* per MHr
*Rounded
6–11
1.Allocation:
MaintenancePersonnelAssemblyPainting
Square footage—0.200.400.40
Number of employees0.10—0.240.66
P= $60,000 + 0.2MM = $200,000 + 0.1P
P= $60,000 + 0.2($200,000 + 0.1P)M = $200,000 + 0.1($102,041)
P= $60,000 + $40,000 + 0.02PM = $200,000 + $10,204
0.98P= $100,000M = $210,204
P= $102,041
AllocateAllocateTotal After
Direct CostMaintenance*Personnel**Allocation
Maintenance $200,000 $(210,204)$ 10,204$ 0
Personnel 60,000 42,041 (102,041) 0
Assembly 43,000 84,082 24,489*** 151,571
Painting 74,000 84,082 67,347 225,429
$377,000 $377,000
*(0.20 $210,204) = $42,041**(0.10 $102,041) = $10,204
(0.40 $210,204) = $84,082(0.24 $102,041) = $24,489
(0.40 $210,204) = $84,082(0.66 $102,041) = $67,347
***Rounded down to balance.
2.Departmental overhead rates:
Assembly:$151,571/25,000 = $6.06*/DLH
Painting:$225,429/40,000 = $5.64*/DLH
*Rounded
6–12
1.Allocation:
AssemblyPainting
Square footage0.50000.5000
Number of employees0.26670.7333
Maintenance:
(0.5000 $200,000)$100,000
(0.5000 $200,000)$100,000
Personnel:
(0.2667 $60,000)16,002
(0.7333 $60,000)43,998
Direct costs43,00074,000
$159,002$217,998
2.Department overhead rates:
Assembly:$159,002/25,000 = $6.36*/DLH
Painting:$217,998/40,000 = $5.45*/DLH
*Rounded
6–13
1.Allocation:
PersonnelAssemblyPainting
Square footage0.20000.40000.4000
Number of employees—0.26670.7333
Maintenance:
(0.2000 $200,000)$40,000
(0.4000 $200,000)$80,000
(0.4000 $200,000)$80,000
Personnel:
[0.2667 ($60,000 + $40,000)]26,670
[0.7333 ($60,000 + $40,000)]73,330
Direct costs43,00074,000
Total$40,000$149,670$227,330
2.Departmental overhead rates:
Assembly:$149,670/25,000 = $5.99* per DLH
Painting:$227,330/40,000 = $5.68* per DLH
*Rounded
6–14
1.Allocation:
TulsaAmes
Ratio for fixed costs*0.650.35
Fixed costs**$39,000$21,000
Variable costs***65,00035,000
Total$104,000$56,000
*Tulsa = 1,625/2,500 = 0.65; Ames = 875/2,500 = 0.35
**($60,000 0.65) (60,000 0.35)
***$40 1,625 and $40 875
2.Costing out services serves the same purposes as costing out tangible products (e.g., pricing, profitability analysis, and performance evaluation). Once the costs are allocated to each revenue-producing center, then the costs must be assigned to individual services through the use of an overhead rate or rates.
6–15
1.a.If the purpose is to cost out individual services, the allocation is identical to that given in Requirement 1 of Exercise 6-14.
b.If the purpose is for performance evaluation, then variable costs equal the predetermined rate multiplied by the actual usage. The fixed costs are allocated the same way as before.
TulsaAmes
Variable costs:
$40 1,200$48,000
$40 1,100$44,000
Fixed costs39,00021,000
$87,000$65,000
2.The allocated costs of $152,000 were $1,500 higher than the actual costs of $150,500, because the producing departments are charged an allocation based on budgeted costs rather than actual costs. Budgeted costs are allocated so that the efficiencies or inefficiencies of the legal services center are not assigned to the user departments.
6–16
1.2003 graphics rate $12,000/(2,000 + 2,000) = $3.00/hour
2004 graphics rate $14,000/(2,000 + 2,000 + 1,000) = $2.80/hour
2.Total charge to the Nonprofit Organ. Dept. = $2.80 1,000 = $2,800
Mike Adams is no doubt angry. The amount charged was $800 above the indicated charge of $2,000.
3.Graphics Department charges did increase by $2,000 ($14,000 – $12,000). However, the charging rate changed as well. Thus, Tangible Goods and Public Relations saw a decrease in their graphics charges of $400 each. It is this $400 decrease (times 2) which showed up as an $800 increase in Mike’s bill.
problems
6–17
1.Allocation ratios for fixed costs (uses normal levels):
SLCRenoPortland
Hrs. of flight time0.25000.50000.2500
No. of passengers0.33330.50000.1667
Variable rates:
Maintenance:$30,000/8,000 = $3.75 per flight hour
Baggage:$64,000/30,000 = $2.1333 per passenger
SLCRenoPortland
Maintenance—fixed:
(0.25 $240,000)$60,000
(0.50 $240,000)$ 120,000
(0.25 $240,000)$60,000
Maintenance—variable:
($3.75 2,000)7,500
($3.75 4,000)15,000
($3.75 2,000)7,500
Baggage—fixed:
(0.3333 $150,000)49,995
(0.5000 $150,000)75,000
(0.1667 $150,000)25,005
Baggage—variable:
($2.1333 10,000)21,333
($2.1333 15,000)32,000
($2.1333 5,000)10,667
$138,828$242,000$103,172
6–17Concluded
2.The allocations are the same as in Requirement 1, except variable costs are assigned using actual instead of budgeted activity.
SLCRenoPortland
Maintenance—fixed$60,000$ 120,000$60,000
Maintenance—variable:
($3.75 1,800)6,750
($3.75 4,200)15,750
($3.75 2,500)9,375
Baggage—fixed49,99575,00025,005
Baggage—variable:
($2.1333 8,000)17,066
($2.1333 16,000)34,133
($2.1333 6,000)12,800
$133,811$244,883$107,180
Yes, maintenance actually cost $315,000, but only $271,875 was allocated. Baggage actually cost $189,000, but $213,999 was allocated (no costs remain). Actual costs are not allocated so that inefficiencies or efficiencies are not passed on.
6–18
1.Direct method:
Proportion of:PotteryRetail
Machine hours0.3750.625
Number of employees0.4290.571
Power:
(0.375 $100,000)$37,500
(0.625 $100,000)$62,500
Human Resources:
(0.429 $205,000)87,945
(0.571 $205,000)117,055
Direct costs80,00050,000
$205,445$229,555
6–18Concluded
2.Sequential method:
PowerHuman Res.PotteryRetail
Machine hours——0.3750.625
Employees0.125—0.3750.500
Direct costs$ 100,000 $205,000 $ 80,000 $ 50,000
Human Resources:
(0.125 $205,000) 25,625 (25,625)
(0.375 $205,000) (76,875) 76,875
(0.500 $205,000) (102,500) 102,500
Power:
(0.375 $125,625) (47,109) 47,109
(0.625 $125,625) (78,516) 78,516
$ 0$ 0$203,984$231,016
3.Reciprocal method:
PowerHuman Res.PotteryRetail
Machine hours—0.2000.3000.500
Employees0.125—0.3750.500
HR= $205,000 + 0.200PP = $100,000 + 0.125HR
HR= $205,000 + 0.200($100,000 + 0.125HR)P = $100,000 +
0.125($230,769)
HR= $205,000 + $20,000 + 0.025HRP = $128,846
0.975HR= $225,000
HR= $230,769
Total CostPotteryRetail
Human Resources:$230,769
(0.375 $230,769)$86,538
(0.500 $230,769)$115,385
Power:128,846
(0.3 $128,846)38,654
(0.5 $128,846)64,423
Direct costs80,00050,000
$ 205,192$229,808
6–19
1.RepairPowerMoldingAssembly
Department costs$ 48,000 $250,000$200,000 $ 320,000
Allocation of:
Repair (1/9, 8/9) (48,000) 0 5,333 42,667
Power (7/8, 1/8) 0 (250,000)218,750 31,250
Total overhead cost$ 0$ 0$424,083$393,917
Direct labor hours ÷ 40,000÷160,000
Overhead rate per DLH $ 10.60* $2.46*
*Rounded
2.Algebraic equations for relationship between service departments
(R = Repair Department; P = Power Department):
R = $48,000 + 0.2P
P = $250,000 + 0.1R
R= $48,000 + 0.2($250,000 + 0.1R)
= $48,000 + $50,000 + 0.02R
0.98R= $98,000
R= $100,000
P = $250,000 + 0.1($100,000)
P = $260,000
RepairPowerMoldingAssembly
Department costs$ 48,000 $250,000 $ 200,000 $ 320,000
Allocation of:
Repair (0.1, 0.1, 0.8) (100,000) 10,00010,00080,000
Power (0.2, 0.7, 0.1) 52,000 (260,000)182,000 26,000
Total overhead cost$ 0$ 0$392,000$426,000
Direct labor hours ÷ 40,000 ÷ 160,000
Overhead rate per DLH $ 9.80$2.66*
*Rounded
3.The direct allocation method ignores any service rendered by one support department to another. Allocation of each support department’s total cost is made directly to the production departments. The reciprocal allocation method recognizes all support department support to one another through the use of simultaneous equations or linear algebra. This allocation procedure is more accurate and should lead to better results which would be of greater value to management. However, the method is infrequently used in actual practice because of the problems associated with developing a more complex or difficult model to recognize the interrelationships between support departments.
6–20
1.$40,000/300,000 = $0.1333/mile (uses normal activity)
2.Variable rate: ($40,000 – $16,000)/300,000 = $0.08/mile
BudgetLuxuryTruck
Fixed cost allocation ratios0.40000.33330.2667
Allocation of costs:
Fixed portion ($16,000 ratio*)$6,400$5,333$4,267
Variable portion (act. miles $0.08)12,0008,8008,000
$18,400$14,133$12,267
*Budget:120,000/300,000
Luxury:100,000/300,000
Truck:80,000/300,000
3.Of the actual fixed costs, $1,100 ($17,100 – $16,000) was not allocated. Only budgeted fixed costs were allocated. Variable costs of $1,200 ($30,000 – $28,800) weren’t allocated because the actual variable rate ($0.083 per mile = $30,000/360,000) was greater than the budgeted rate ($0.08 per mile). In both cases, this practice follows the principle of not passing on efficiencies or inefficiencies of the support department to the producing departments.
6–21
1.Henderson($431,800/$2,540,000)($182,500)*= $31,025
Boulder City($508,000/$2,540,000)($182,500)= $36,500
Kingman($381,000/$2,540,000)($182,500)= $27,375
Flagstaff($635,000/$2,540,000)($182,500)= $45,625
Glendale($584,200/$2,540,000)($182,500)= $41,975
*($26)(3,750) + $85,000 = $182,500
6–21Concluded
2.Share of Accounting Department fixed costs based on 2003 sales:
Henderson($337,500/$2,250,000)($85,000) = $12,750
Boulder City($450,000/$2,250,000)($85,000) = $17,000
Kingman($360,000/$2,250,000)($85,000) = $13,600
Flagstaff($540,000/$2,250,000)($85,000) = $20,400
Glendale($562,500/$2,250,000)($85,000) = $21,250
Variable Cost+Fixed Cost=Total
Henderson($26)(1,475)=$38,350+$12,750=$51,100
Boulder City($26)(400)=$10,400+$17,000=$27,400
Kingman($26)(938)=$24,388+$13,600=$37,988
Flagstaff($26)(562)=$14,612+$20,400=$35,012
Glendale($26)(375)=$9,750+$21,250=$31,000
3.The method in Requirement 2 ties cost allocated to the driver that causes the cost. Thus, motels would be more likely to use Accounting Department time efficiently. The method in Requirement 1 assigns accounting costs on the basis of a variable which may not be causally related. Also, a motel with stable sales from year to year may still experience wild fluctuations in allocated cost due to changing sales patterns of other motels.
6–22
1.Single rate = [$210,000 + 6,000($14)]/6,000 = $49 per legal hour
Great West Tissue (25 $49)$1,225
Morton Canned Meats (1,400 $49)68,600
Pettigrew Valve and Tap (3,600 $49)176,400
Bellini Musical Instruments (1,000 $49)49,000
Total$295,225
6–22Concluded
2.Dual rate: $14 per legal hour plus share of budgeted fixed costs
BudgetedShare of
DivisionHoursPercentFixed Cost
Great West Tissue5008.333$17,499
Morton Canned Meats1,50025.00052,500
Pettigrew Valve and Tap3,00050.000105,000
Bellini Musical Instruments1,000 16.66735,001
Total6,000100.000$210,000
ActualVar.Var.FixedTotal
DivisionHoursRateAmountAmountCost
Great West Tissue25$14$350$17,499$17,849
Morton Canned Meats1,4001419,60052,50072,100
Pettigrew Valve & Tap3,6001450,400105,000155,400
Bellini Musical Instr.1,0001414,00035,00149,001
Total$84,350$210,000$294,350
3.Actual variable costs$83,145
Actual fixed costs 215,000$298,145
Costs charged294,350
Difference$3,795
The Legal Department spent $3,795 more than was charged to the divisions. Fixed costs were $5,000 over budget. (Actual fixed costs were $215,000, and budgeted fixed costs were $210,000.) However, variable costs came in under budget. The budgeted variable rate was $14, but actual variable cost per hour was $13.80 ($83,145/6,025), resulting in $0.20 savings times the 6,025 actual hours worked.
4.In general, the dual-rate method is preferred. However, some divisions would not be pleased with their charges after the first year. In particular, Great West Tissue is charged far more under the dual-rate method ($17,849) than under the single-rate method ($1,225), because it overestimated its legal needs for the first year. This led to a larger share of fixed costs. This may not be a long-term problem, since Great West may require more legal services in the future (making the first-year experience an anomaly). Note that the estimates made by all four divisions led to the establishment of the size Legal Department created and that each division must bear responsibility for its estimate.
6–23
1.Clearly, some expenses pertain to women living in the house while others pertain to all members. In-house members use the second floor, most of the food, and most of the variable expenses. All members use the first-floor facilities, food for Monday night dinners, and cereal and milk for snacks. HCB must determine a fair method of allocating the costs since the sorority is a nonprofit entity and house bills in total must equal house costs. It is difficult to allocate the costs precisely to the two types of members given the sketchy nature of the data.
2.Using a benefits-received approach, the following charging rates might be applied.