filess/acc3200leelecture194b11s-11qma15u.pptx
Service Department Costing
Appendix 4B & 11(p512-516)
1
ACC3200 HEEMIN LEE
Heemin Lee
Click to edit Master title style
Click to edit Master text styles
Second level
Third level
Fourth level
Fifth level
1
agenda
Service department allocations (Appendix 4B)
Overview
Allocation approaches
Direct method
Step-down method
Reciprocal method
Service department charges (Ch11)
Overview
Charging costs by behavior
ACC3200 HEEMIN LEE
2
2
Service department allocations (appendix 4B)
An operating department carries out the central purpose of the organization.
E.g. the Accounting Department at Baruch College, the Assembly Department at General Motors, the Surgery Department at Mount Sinai Hospital, etc.
A service department does not directly engage in operating activities.
E.g. the Accounting Department at Macy’s, the Human Resources Department at Walgreens, etc.
ACC3200 HEEMIN LEE
3
3
Overview: Interdepartmental Services
Service
Department
Operating
Department
Costs of the service department become overhead costs to the operating department
ACC3200 HEEMIN LEE
4
4
Allocation approaches
1. Direct method
2. Step-down method
3. Reciprocal method
ACC3200 HEEMIN LEE
5
Reciprocal Services
Service
Department 1
Service
Department 2
When service departments provide services to each other we call them reciprocal services.
ACC3200 HEEMIN LEE
6
6
Direct Method
Service
Department
(Cafeteria)
Service
Department
(Custodial)
Operating
Department
(Machining)
Operating
Department
(Assembly)
Interactions
between service
departments are
ignored and all
costs are
allocated directly
to operating
departments.
ACC3200 HEEMIN LEE
7
7
Direct Method
ACC3200 HEEMIN LEE
8
8
Direct Method
How much of the Cafeteria and Custodial costs should be allocated to each operating department using the direct method of cost allocation?
ACC3200 HEEMIN LEE
9
9
Direct Method
ACC3200 HEEMIN LEE
10
Allocation base: Number of employees
$360,000 ×
20
20 + 30
= $144,000
10
Direct Method
ACC3200 HEEMIN LEE
11
Allocation base: Number of employees
$360,000 ×
30
20 + 30
= $216,000
11
Direct Method
ACC3200 HEEMIN LEE
12
Allocation base: Square feet occupied
$90,000 ×
25,000
25, XXXXXXXXXX,000
= $30,000
12
Direct Method
ACC3200 HEEMIN LEE
13
Allocation base: Square feet occupied
$90,000 ×
50,000
25, XXXXXXXXXX,000
= $60,000
13
Operating
Department
(Machining)
Operating
Department
(Assembly)
Step-down Method
Once a service
department’s costs
are allocated,
other service
department costs
are not allocated
back to it.
Service
Department
(Cafeteria)
Service
Department
(Custodial)
ACC3200 HEEMIN LEE
14
The allocation process is sequential and the sequence usually begins with the department that provides the greatest amount of service to other service departments.
14
Step-down Method
ACC3200 HEEMIN LEE
15
There are three key points to understand regarding the step-down method:
In both the direct and step-down methods, any amount of the allocation base attributable to the service department whose cost is being allocated is always ignored.
Any amount of the allocation base that is attributable to a service department whose cost has already been allocated is ignored.
Each service department assigns its own costs to operating departments plus the costs that have been allocated to it from other service departments.
15
Step-down Method
ACC3200 HEEMIN LEE
16
Recall the data used in the direct method example.
16
Step-down Method
Allocate Cafeteria costs first since
it provides more service than Custodial.
ACC3200 HEEMIN LEE
17
17
$360,000 ×
10
XXXXXXXXXX
= $60,000
Allocation base: Number of employees
Step-Down Method
$360,000 ×
20
XXXXXXXXXX
= $120,000
Step-Down Method
Allocation base: Number of employees
$360,000 ×
30
XXXXXXXXXX
= $180,000
Step-Down Method
Allocation base: Number of employees
New total = $90,000 original Custodial cost
plus $60,000 allocated from the Cafeteria.
Step-Down Method
$150,000 ×
25,000
25, XXXXXXXXXX,000
= $50,000
Step-Down Method
Allocation base: Square feet occupied
$150,000 ×
50,000
25, XXXXXXXXXX,000
= $100,000
Step-Down Method
Allocation base: Square feet occupied
Reciprocal Method
Interdepartmental
services are given
full recognition
rather than partial
recognition as with
the step-down method.
Service
Department
(Cafeteria)
Service
Department
(Custodial)
Operating
Department
(Machining)
Operating
Department
(Assembly)
Because of its mathematical complexity,
the reciprocal method is rarely used.
ACC3200 HEEMIN LEE
24
24
Quick Check
Allocation bases:
Business school administration costs (ADMIN):
Number of employees
Business Administration computer services
(BACS): Number of personal computers
The direct method of allocation is used.
ACC3200 HEEMIN LEE
25
25
Quick Check
How much cost will be allocated from Administration to Accounting?
a. $ 36,000
b. $144,000
c. $180,000
d. $ 27,000
ACC3200 HEEMIN LEE
26
26
Quick Check
How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department?
a. $ 52,500
b. $135,000
c. $270,000
d. $ 49,500
ACC3200 HEEMIN LEE
27
27
Quick Check
Allocation bases:
Business school administration costs (ADMIN):
Number of employees
Business administration computer services
(BACS): Number of personal computers
The step-down method of allocation is used.
ACC3200 HEEMIN LEE
28
28
Quick Check
How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department? (Round to the nearest whole number)
a. $35,250
b. $49,072
c. $18,000
d. $26,333
ACC3200 HEEMIN LEE
29
29
Service department charges (Ch 11)
Service department costs are assigned to operating departments for a variety of reasons including:
To encourage operating departments to wisely use service department resources
To provide operating departments with more complete data for making decisions
To help measure the profitability of operating departments
To create an incentive for service departments to operate efficiently.
ACC3200 HEEMIN LEE
30
30
Service department charges (Ch 11)
The service department charges considered in this appendix can be viewed as a transfer price that is charged for services provided by service departments to operating departments.
$
Operating
Departments
Service
Departments
ACC3200 HEEMIN LEE
31
31
Charging costs by behavior
Whenever possible, variable and fixed service department costs should be charged separately.
Variable service department costs should be charged to consuming departments according to whatever activity causes the incurrence of the cost.
i.e., using a predetermined rate applied to the actual services consumed.
ACC3200 HEEMIN LEE
32
Charging costs by behavior
Fixed service department costs should be charged to consuming departments in lump sum amounts in proportion to their peak-period or long-run average servicing needs.
The lump-sum amount should be based on budgeted fixed costs.
The charges are based on the amount of capacity each consuming department requires.
They should not vary from period to period.
ACC3200 HEEMIN LEE
33
Budgeted variable
and fixed service department
costs should be charged to
operating departments.
33
Sipco has a maintenance department and two operating
departments: cutting and assembly. Variable maintenance
costs are budgeted at $0.60 per machine hour. Fixed
maintenance costs are budgeted at $200,000 per year.
Data relating to the current year are:
Allocate maintenance costs to the two operating departments.
Example 1
ACC3200 HEEMIN LEE
34
34
POHR
Example 1
ACC3200 HEEMIN LEE
35
Actual Hours Used
35
Example 1
ACC3200 HEEMIN LEE
36
Percent of peak-period capacity.
Budgeted
36
Example 2
Reese corporation operates a Medical Service Department for its employees. Charges to the company’s operating departments for the variable costs of the Medical Service Department are based on the actual number of employees in each department. Charges for the fixed costs of the Medical Service Department are based on the long-run average number of employees in each operating department.
For the Medical Service Department, variable costs are budgeted at $60 per employee, and fixed costs are budgeted at $600,000 per year. Actual Medical Service Department costs for the most recent year were $105,400 for variable costs and $605,000 for fixed costs
ACC3200 HEEMIN LEE
37
Example 2
Data concerning employees in the three operating departments follow:
1. Determine the Medical Service Department charges for the year to each of the operating departments: Cutting, Milling, and Assembly.
2. How much, if any, of the Medical Service Department costs for the year should not be allocated to the operating departments?
Cutting Milling Assembly
Budgeted number of employees 600 300 900
Actual number of employees for the most recent year 500 400 800
Long-run average number of employees 600 400 1,000
ACC3200 HEEMIN LEE
38
Example 2
1. Determine the Medical Service Department charges for the year to each of the operating departments: Cutting, Milling, and Assembly.
Cutting Milling Assembly
Variable cost allocation:
$60*500 (actual)
$60*400
$60*800 $30,000 $24,000 $48,000
Fixed cost allocation:
$600,000*600/2,000
$600,000*400/2,000
$600,000*1,000/2,000 180,000 120,000 300,000
Total allocation cost $210,000 $144,000 $348,000
ACC3200 HEEMIN LEE
39
Example 2
2. How much, if any, of the Medical Service Department costs for the year should not be allocated to the operating departments?
Actual costs = 105, XXXXXXXXXX,000 = $710,400
Total costs that should be charged = 210,000+144,000+348,000
= $702,000
Therefore, the amount that should not be charged
= $710,400 - $702,000
= $8,400
ACC3200 HEEMIN LEE
40
40
End of lecture 19
41
ACC3200 HEEMIN LEE
41
Sheet1
Service Departments Operating Departments
Cafeteria Custodial Machining Assembly
Departmental costs
before allocation $ 360,000 $ 90,000 $ 400,000 $ 700,000
Number of employees 15 10 20 30
Square feet occupied 5,000 2,000 25,000 50,000
&A
Page &P
Sheet2
&A
Page &P
Sheet3
&A
Page &P
Sheet4
&A
Page &P
Sheet5
&A
Page &P
Sheet6
&A
Page &P
Sheet7
&A
Page &P
Sheet8
&A
Page &P
Sheet9
&A
Page &P
Sheet10
&A
Page &P
Sheet11
&A
Page &P
Sheet12
&A
Page &P
Sheet13
&A
Page &P
Sheet14
&A
Page &P
Sheet15
&A
Page &P
Sheet16
&A
Page &P
Service DepartmentsOperating Departments
CafeteriaCustodialMachiningAssembly
Departmental costs
before allocation360,000$ 90,000$ 400,000$ 700,000$
Number of employees XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
Square feet occupied5, XXXXXXXXXX, XXXXXXXXXX, XXXXXXXXXX,000
Sheet1
Service Departments Operating Departments
Cafeteria Custodial Machining Assembly
Departmental costs
before allocation $ 360,000 $ 90,000 $ 400,000 $ 700,000
Number of employees 10 6 20 30
Square feet occupied 5,000 2,000 25,000 50,000
&A
Page &P
Sheet2
Service Department Allocation Base
Cafeteria Number of employees
Custodial Square feet occupied
&A
Page &P
Sheet3
&A
Page &P
Sheet4
&A
Page &P
Sheet5
&A
Page &P
Sheet6
&A
Page &P
Sheet7
&A
Page &P
Sheet8
&A
Page &P
Sheet9