1. Allocation of Support Department Costs, Common Costs, and Revenues
CHAPTER 15
Allocation of
Support Department Costs,
Common Costs,
and Revenues

2. Allocating Costs of a Supporting Department to Operating Departments
Supporting (Service) Department – provides the services that assist other internal departments in the company
Operating (Production) Department – directly adds value to a product or service

3. Methods to Allocate Support Department Costs
Single-Rate Method – allocates costs in each cost pool (service department) to cost objects (production departments) using the same rate per unit of a single allocation base
No distinction is made between fixed and variable costs in this method

4. Methods to Allocate Support Department Costs
Dual-Rate Method – segregates costs within each cost pool into two segments: a variable-cost pool and a fixed-cost pool.
Each pool uses a different cost-allocation base

5. Allocation Bases
Under either method, allocation of support costs can be based on one of the three following scenarios:
Budgeted overhead rate and budgeted hours
Budgeted overhead rate and actual hours
Actual overhead rate and actual hours
Choosing between actual and budgeted rates: budgeted is known at the beginning of the period, while actual will not be known with certainty until the end of the period

6. Methods of Allocating Support Costs to Production Departments
Direct
Step-Down
Reciprocal

7. Direct Method Allocates support costs only to Operating Departments
No interaction between Support Departments prior to allocation

8. Direct Method

9. Step-Down Method
Allocates support costs to other support departments and to operating departments that partially recognizes the mutual services provided among all support departments
One-way interaction between Support Departments prior to allocation

10. Step-Down Method

11. Reciprocal Method
Allocates support department costs to operating departments by fully recognizing the mutual services provided among all support departments
Full two-way interaction between Support Departments prior to allocation

12. Reciprocal Method

13. Allocating Common Costs
Common Cost – the cost of operating a facility, activity, or like cost object that is shared by two or more users at a lower cost than the individual cost of the activity to each user

14. Methods of Allocating Common Costs
Stand-Alone Cost-Allocation Method – uses information pertaining to each user of a cost object as a separate entity to determine the cost-allocation weights
Incremental Cost-Allocation Method – ranks the individual users of a common cost object in the order of users most responsible for the common cost and then uses this ranking to allocate cost among those users.

15. Revenue Allocation and Bundled Products
Revenue Allocation occurs when revenues are related to a particular revenue object but cannot be traced to it in an economically feasible manner
Revenue Object – anything for which a separate measurement of revenue is desired
Bundled Product – a package of two or more products or services that are sold for single price, but individual components of the bundle also may be sold as separate items at their own “stand-alone” prices

16. CHAPTER 15
THE END