1. Cost Management ACCOUNTING AND CONTROL
HANSEN & MOWEN

2. Allocating Costs of Support Departments and Joint Products
CHAPTER 7
Allocating Costs of Support Departments and Joint Products

3. The cost objects must be determined, which are usually departments.
OBJECTIVE 1
An Overview of Cost Allocation
Allocation is dividing a pool of costs and assigning those costs to subunits.
The cost objects must be determined, which are usually departments.
Producing
Support

4. Examples of Departmentalization for a Manufacturing Firm
OBJECTIVE 1
An Overview of Cost Allocation
Examples of Departmentalization for a Manufacturing Firm

5. Examples of Departmentalization for a Service Firm
OBJECTIVE 1
An Overview of Cost Allocation
Examples of Departmentalization for a Service Firm

6. 1 An Overview of Cost Allocation
OBJECTIVE 1
An Overview of Cost Allocation
Steps in Allocating Support Department Costs to Producing Departments

7. 1 An Overview of Cost Allocation
OBJECTIVE 1
An Overview of Cost Allocation
Examples of Possible Activity Drivers for Support Departments
Allocating support department costs should be on the basis of appropriate causal factors (activity drivers).

8. Objectives of Allocation1
An Overview of Cost Allocation
Objectives of Allocation
To obtain a mutually agreeable price
To compute product-line profitability
To predict the economic effects of planning and control
To value inventory
To motivate managers

9. 2 Allocating One Department’s Cost to Another Department
OBJECTIVE 2
Allocating One Department’s Cost to Another Department
The costs of a support department are often allocated through the use of a charging rate.
Major factors:
Choice of single or dual rate
Use of budgeted or actual support department costs.

10. Fixed costs + estimated variable costs estimated usage
OBJECTIVE 2
Allocating One Department’s Cost to Another Department
Fixed costs + estimated variable costs estimated usage
Single rate:
Dual rate:
Fixed rate and a variable rate
Development of fixed rate:
Determine budgeted fixed costs.
Compute allocation ratio
Allocate
Development of variable rate:
Costs that change as the activity driver changes

11. 2 Allocating One Department’s Cost to Another Department
OBJECTIVE 2
Allocating One Department’s Cost to Another Department
When allocating support department costs, should actual or budgeted costs be allocated?
Answer: Budgeted – to prevent the transfer of efficiencies or inefficiencies from one department to another.

12. 2 Allocating One Department’s Cost to Another Department
OBJECTIVE 2
Allocating One Department’s Cost to Another Department
Use of Budgeted Data for Products Costings: Comparison of Single- and Dual-Rate Methods

13. 2 Allocating One Department’s Cost to Another Department
OBJECTIVE 2
Allocating One Department’s Cost to Another Department
Use of Actual Data for Performance Evaluation Pur- poses: Comparison of Single- and Dual-Rate Methods

14. Data for Illustrating Allocation Methods
OBJECTIVE 3
Choosing A Support Department Cost Allocation Method
Data for Illustrating Allocation Methods
*For a producing department, direct costs refer only to overhead costs that are directly traceable to the department.

15. Direct Allocation Ilustrated
OBJECTIVE 3
Choosing A Support Department Cost Allocation Method
Direct Allocation Ilustrated

16. Sequential Allocation Ilustrated
OBJECTIVE 3
Choosing A Support Department Cost Allocation Method
Sequential Allocation Ilustrated

17. Data for Illustrating Reciprocal Method
OBJECTIVE 3
Choosing A Support Department Cost Allocation Method
Data for Illustrating Reciprocal Method

18. Reciprocal Method Illustrated
OBJECTIVE 3
Choosing A Support Department Cost Allocation Method
Reciprocal Method Illustrated
a Power: 0.60  $271,429; Maintenance: 0.45  $214,286.
b Power: 0.20  $271,429; Maintenance: 0.45  $214,286.
*Rounded down.

19. 3 Choosing A Support Department Cost Allocation Method
OBJECTIVE 3
Choosing A Support Department Cost Allocation Method
Comparison of Support Department Cost Allocations Using the Direct, Sequential, and Reciprocal Methods

20. 4 Departmental Overhead Rates and Product Costing
OBJECTIVE 4
Departmental Overhead Rates and Product Costing
After allocating all support service costs to producing departments, an overhead rate is calculated for each department.
Allocated service costs + Producing dept. overhead costs
Measure of activity (direct labor hours, machine hours)

21. A product cost can now be determined.
OBJECTIVE 4
Departmental Overhead Rates and Product Costing
A product cost can now be determined.
Materials
+ Labor
+ Overhead
Product Cost

22. 5 Accounting for Joint Production Processes
OBJECTIVE 5
Accounting for Joint Production Processes
Joint products are two or more products produced simultaneously by the same process up to a “split-off” point.
The split-off point is the point at which the joint products become separate and identifiable.
Separable costs are easily traced to individual products and offer no particular problem.

23. Joint Production Process
OBJECTIVE 5
Accounting for Joint Production Processes
Joint Production Process
Hide
Pork Meat
Split-Off
Point
Material: Hog
Processing

24. 5 Accounting for Joint Production Processes
OBJECTIVE 5
Accounting for Joint Production Processes
Independent Multiple-Product Production Using the Same Material
Processing
Taurus
Mustang
Material: Steel

25. 5 Accounting for Joint Production Processes
OBJECTIVE 5
Accounting for Joint Production Processes
The distinction between joint and by-products rests solely on the relative importance of their sales value.
A by-product is a secondary product recovered in the course of manufacturing a primary product.

26. 5 Accounting for Joint Production Processes
OBJECTIVE 5
Accounting for Joint Production Processes
The distinction between joint and by-products rests solely on the relative importance of their sales value.
A by-product is a secondary product recovered in the course of manufacturing a primary product.

27. 5 Accounting for Joint Production Processes
OBJECTIVE 5
Accounting for Joint Production Processes
Benefits-Received Approaches
Physical Units Method
Weighted Average Method
Allocation Based on Relative Market Value
Sales-Value-at-Split-Off-Method
Net Realizable Value Method

28. 5 Accounting for Joint Production Processes Physical Units Method
OBJECTIVE 5
Accounting for Joint Production Processes
Physical Units Method
A sawmill processes logs into four grades of lumber totaling 3,000,000 board feet as follows:
Percent of Joint Cost
Grades Board Feet Units Allocation
First and second 450, $ 27,900
No. 1 common 1,200, ,400
No. 2 common 600, ,200
No. 3 common , ,500
Totals 3,000,000 $186,000

29. Weighted Average Method
OBJECTIVE 5
Accounting for Joint Production Processes
Weighted Average Method
A peach canning factory purchases $5,000 of peaches and grades and cans them by quality. The following data pertains to this operation:
Number Weight Weighted Number Allocated
Grades of Cases Factor of Cases Percent Joint Cost
Fancy $1,083
Choice ,100
Standard ,525
Pie
Totals $5,000

30. Sales-Value-at-Split-Off Method
OBJECTIVE 5
Accounting for Joint Production Processes
Sales-Value-at-Split-Off Method
Using the lumber mill example from earlier--
Price at Percent
Quantity Split-Off Sales of Total Allocated
Produced (per 1, Value at Market Joint
Grades (board ft.) board ft.) Split-Off Value Cost
First and second 450,000 $300 $135, $ 50,201
No. 1 common 1,200, , ,261
No. 2 common 600, , ,007
No. 3 common , , ,530
Totals 3,000,000 $500,100 $185,999 *
*Rounding error

31. Net Realizable Value Method
OBJECTIVE 5
Accounting for Joint Production Processes
Net Realizable Value Method
A company manufactures two products, Alpha and Beta, from a joint process. One production run costs $5,750 and results in 1,000 gallons of Alpha and 3,000 gallons of Beta. Neither product is salable at the split-off point, but must be further processed. The separable cost for Alpha is $1 per gallon and for Beta is $2 per gallon.
Further Hypothetical Hypothetical Allocated
Market Processing Market Number Market Joint
Price Cost Price of Units Value Cost
Alpha $5 $1 $4 1,000 $ 4,000 $2,300
Beta , , ,450
$10,000 $5,750

32. Constant Gross Margin Percentage Method
OBJECTIVE 5
Accounting for Joint Production Processes
Constant Gross Margin Percentage Method
Percent
Revenue ($5 x 1,000) + ($4 x 3,000) $17, %
Costs [$5,750 + ($1 x 1,000) + ($2 x 3,000)] 12, % Gross margin $ 4, %
Alpha Beta
Eventual market value $ 5,000 $12,000
Less: Gross margin at 25% of market value 1, ,000
Cost of goods sold $ 3,750 $ 9,000
Less: Separable costs 1, ,000
Allocated joint costs $2,750 $ 3,000

33. End of Chapter 7