Maliyet Muhasebesi SUPPORT ' 2000 Prentice Hall Business Publishing 14 - 1 Allocating Support Departments Costs Introduction Cost allocation is an inescapable problem in nearly every organization. This chapter emphasizes the allocation of costs to divisions, plants, departments, and contracts. This chapter also addresses the allocation of costs to products and customers. Purposes of Cost Allocation Indirect costs are costs that are related to the particular cost object but cannot be traced to it in an economically feasible (cost effective) way. Why do managers allocate indirect costs to these cost objects? Purposes of Cost Allocation There are four essential purposes of cost allocation: 1 To provide information for economic decisions 2 To motivate managers and other employees 3 To justify costs or compute reimbursement 4 To measure income and assets for reporting to external parties Cost Allocation The allocation of a particular cost need not satisfy all four purposes simultaneously. N S W E Direct, step-down, and reciprocal methods of allocating support department costs' 2000 Prentice Hall Business Publishing 14 - 2 Allocating Support Departments Costs Organizations distinguish between operating departments and support departments. An operating department (a production department in manufacturing companies) adds value to a product or service. A support department (service department) provides the services that assist other operating and support departments in the organization. Three methods are widely used to allocate the costs of support departments to operating departments: 1 Direct allocation method 2 Step-down method 3 Reciprocal method Allocating Support Departments Costs Direct method: Allocates support department costs to operating departments only. Step-down (sequential allocation) method: Allocates support department costs to other support departments and to operating departments. Allocating Support Departments Costs Reciprocal allocation method: Allocates costs by including the mutual services provided among all support departments. The direct method and the step-down method are less accurate than the reciprocal method when support departments provide services to one another reciprocally. Allocating Support Departments Costs The following information pertains to the Toledo Division of Sandy Corporation: Recall that the Toledo Division has two operating departments: Assembly and Finishing, and two support departments: Maintenance and Human Resources. Allocating Support Departments Costs Maintenance is allocated using square feet. Human Resources is allocated using number of employees. Total square feet = 255,000 Total number of employees = 95 Allocating Support Departments Costs' 2000 Prentice Hall Business Publishing 14 - 3 Human Maintenance Resources Budgeted costs before allocations: $300,000 $2,160,000 Square feet: 5,000 30,000 Number of employees: 8 15 Allocating Support Departments Costs Assembly Finishing Budgeted costs before allocations: $1,700,000 $900,000 Square feet: 110,000 110,000 Number of employees: 48 24 Allocating Support Departments Costs Direct Method... – allocates support department costs to operating departments only. The allocation ratio for allocating Maintenance to Assembly is 110,000/220,000 x $300,000 = $150,000. The allocation ratio for allocating Maintenance to Finishing is 110,000/220,000 x $300,000 = $150,000. Direct Method The allocation ratio for allocating Human Resources to Assembly is 48/72 × $2,160,000 = $1,440,000. The allocation ratio for allocating Human Resources to Finishing is 24/72 × $2,160,000 = $720,000. Direct Method Assembly Finishing Original costs: $1,700,000 $ 900,000 Maintenance Allocated: 150,000 150,000 Human Resources Allocated: 1,440,000 720,000 Total $3,290,000 $1,770,000 Step-Down Method... – allocates support department costs to other support departments and to operating departments. Which support department should be allocated first? The support department providing the greatest percentage of support to other support departments is allocated first.' 2000 Prentice Hall Business Publishing 14 - 4 Step-Down Method Maintenance provides 12% of its services to Human Resources. Human Resources provides 10% of its services to Maintenance. The ratio to allocate Maintenance to Human Resources is 30,000/250,000 (or 12%) × $300,000 = $36,000. Step-Down Method The ratio to allocate Maintenance to Assembly is 110,000/250,000 (or 44%) × $300,000 = $132,000. The ratio to allocate Maintenance to Finishing is 110,000/250,000 (or 44%) × $300,000 = $132,000. Step-Down Method Costs before Allocated allocation costs Maintenance $ 300,000 ($300,000) Human Resources $2,160,000 $ 36,000 Assembly $1,700,000 $132,000 Finishing $ 900,000 $132,000 Step-Down Method Human Resources costs to be allocated become $2,160,000 + $36,000 = $2,196,000. The ratio to allocate the $2,196,000 Human Resources costs to: – Assembly is 48/72 × $2,196,000 = $1,464,000. – Finishing is 24/72 × $2,196,000 = $732,000. Step-Down Method Costs before Allocated Allocated allocation costs costs Human Resources: $2,160,000 36,000 (2,196,000) Assembly: $1,700,000 132,000 1,464,000 Finishing: $ 900,000 132,000 732,000 Step-Down Method Total cost after allocation: Assembly Department = $1,700,000 + $132,000 + $1,464,000 = $3,296,000 Finishing Department = $900,000 + $132,000 + $732,000 = $1,764,000' 2000 Prentice Hall Business Publishing 14 - 5 Reciprocal Allocation Method M HR A F Maintenance - 12% 44% 44% Human Resources 10% - 60% 30% Maintenance cost = $300,000 + .10P Human Resource cost = $2,160,000 + .12M Maintenance cost (M) = $300,000 + .10($2,160,000 + .12M) M = $300,000 + $216,000 + .012M .988M = $516,000 M = $522,267 Reciprocal Allocation Method HR = $2,160,000 + .12($522,267) HR = $2,160,000 + $62,672 HR = $2,222,672 Reciprocal Allocation Method M HR A F Before allocation: $300,000 $2,160,000 $1,700,000 $ 900,000 Allocation: (522,267) 62,672 229,797 229,797 Allocation: 222,267 ($2,222,672) 1,333,603 666,802 Total $3,263,400 $1,796,599 Total cost Assembly Department: $3,263,400 Total cost Finishing Department: $1,796,599 Reciprocal Allocation Method