1. Managerial Accounting: An Introduction To Concepts, Methods, And Uses
Chapter 15
Allocating Costs
to Responsibility Centers
Maher, Stickney and Weil

2. Learning Objectives (Slide 1 of 2)
Explain what comprises common (or indirect) costs.
Explain why companies allocate common costs to departments and products.
Describe how to allocate service department costs to production departments.
Explain why activity-based costing is used to allocate service department costs.

3. Learning Objectives (Slide 2 of 2)
Identify methods of allocating marketing and administrative costs to departments.
Explain how to allocate joint-process costs.
Explain why joint-process costs are allocated.

4. Common Costs
Common or indirect costs result from the joint use of a facility or service by several products, departments, or processes
Common costs are allocated to develop division, department or product cost information

5. Service Departments
Service departments offer services internally to other departments
Costs of providing these services must be allocated to other departments
This allocation is done for several reasons
Provides incentives to control use of support services
External reporting requirements for tax and financial reporting purposes require such an allocation

6. Cost allocation
The goal of cost allocation is to assign or allocate all overhead costs to product departments
Cost allocation is a three step process:
Assign direct costs to departments
Allocate indirect costs to departments
Allocate service department costs to production departments

7. Allocating Service Department Costs
Allocating service department costs to production departments can be accomplished by several methods
For example, the step method allocates costs in steps as follows:
Begin with the service dept that receives the smallest amount of services from other service depts.
Allocate its costs to other service and production departments
Distribute the total costs of the service dept receiving the next smallest amount of service from other depts. and so on until all service dept costs have been allocated to production depts.

8. Activity-Based Costing
A more accurate approach to allocate service dept costs might use ABC principles
This approach involves:
Measuring each service dept’s resource spending by unit, batch, product, customer, and facility
Identify and measure activities demanded by other depts. that require support service
Identify appropriate cost drivers and calculate cost-driver rates
Allocate service dept costs based on other depts’ usage of cost-driver bases

9. Marketing and Administrative Expenses
Management will often allocate marketing and administrative costs to departments
Bases for allocating such costs might include the following:
Cost Basis
Storage Costs Floor Space
Handling Costs Tonnage Handled
Delivery Expenses Number of Miles Operated

10. Allocating Joint-Process Costs (Slide 1 of 4)
A joint process produces several different products from one input
Costs to operate joint processes are called joint-process costs
Products resulting from a joint process are called joint products
Joint-process costs must be allocated to joint products to provide managers with product cost information for decision making and performance evaluation

11. Allocating Joint-Process Costs (Slide 2 of 4)
Two major methods of allocating joint-process costs are:
Net realizable value method
Physical quantities method

12. Allocating Joint-Process Costs (Slide 3 of 4)
The net realizable value method allocates joint-process costs based on the net realizable value (NRV) of each product at the splitoff point
NRV is the estimated sales price at splitoff point
May be necessary to estimate NRV if product requires further processing

13. Allocating Joint-Process Costs (Slide 4 of 4)
The physical quantities method allocates joint-process costs based on a physical measure of volume, weight, or any other physical measure
This method is often used when
Product prices are highly volatile
Significant processing occurs between splitoff point and first point of marketability

14. Why Allocate Joint-Process Costs?
Measuring performance
Determining regulatory rate changes
Estimating casualty losses
Resolving contractual interests and obligations
For financial and tax reporting to value inventories and cost of goods sold

15. Dr. Donald R. Trippeer, CPA Colorado State University-Pueblo
If you have any comments or suggestions concerning this PowerPoint Presentation for Managerial Accounting, An Introduction To Concepts, Methods, And Uses, please contact:
Dr. Donald R. Trippeer, CPA
Colorado State University-Pueblo