Cost Allocation Lesson

11th Edition
Chapter 15
McGrawHill/Irwin
Copyright2006,TheMcGrawHillCompanies,Inc.
Service Department
Costing: An Activity
Approach
Chapter Fifteen
McGrawHill/Irwin
Reasons for Allocating Service

Department Costs
To
To encourage
encourage operating
operating
departments
departments to
to wisely
wisely
use
use service
service department
department
resources.
resources.
To
To provide
provide operating
operating
departments
departments with
with more
more
complete
complete cost
cost data
data
for
for making
making decisions.
decisions.
To
To help
help measure
measure the
the
profitability
profitability of
of operating
operating
departments.
departments.
To
To create
create incentive
incentive
for
for service
service departments
departments
to
to operate
operate efficiently.
efficiently.
To
To value
value inventory
inventory for
for
external
external financial
financial
reporting
reporting purposes.
purposes.
To
To include
include all
all overhead
overhead
in
in the
the cost
cost base
base when
when
cost-plus
cost-plus pricing
pricing is
is used.
used.
McGrawHill/Irwin
Selecting Allocation Bases

The
The allocation
allocation bases
bases used
used should
should
drive
drive the
the cost
cost being
being allocated.
allocated.
For
For example,
example, when
when allocating
allocating costs
costs
of
of the
the employee
employee cafeteria,
cafeteria, the
the number
number
of
of meals
meals served
served would
would be
be aa good
good
choice
choice for
for the
the allocation
allocation base.
base.
Service
Departments
McGrawHill/Irwin
Operating
Departments
Selecting Allocation Bases

AAservice
servicedepartments
departmentscosts
costsmay
maybe
be
allocated
allocatedusing
usingmore
more than
than one
onebase.
base.
For
Forexample,
example, aaportion
portion of
of the
thehuman
human resource
resource department
department
costs
costsmight
mightbe
beallocated
allocatedbased
basedon
onthe
thenumber
numberof
of employees
employees
in
ineach
eachoperating
operatingdepartment
department and
and another
another portion
portion might
might be
be
allocated
allocatedbased
basedon
onhours
hoursspent
spent in
intraining
trainingemployees
employeesin
in
each
eachoperating
operatingdepartment.
department.
Service
Departments
McGrawHill/Irwin
Operating
Departments
Examples of Allocation Bases

Service Department
Laundry
Airport Ground Services
Cafeteria
Medical Facilities
Materials Handling
Information Technology
Custodial Services
Cost Accounting
Power
Human Resources
Receiving, Shipping, and Stores
Factory Administration
Maintenance
McGrawHill/Irwin
Exh.
15-1
Allocation Bases
Pounds of laundry
Number of flights
Number of meals
Cases handled; number of employees;
hours worked
Hours of service; volume handled
Number of personal computers;
applications installed
Square footage occupied
Labor hours; customers served
KWH used; capacity of machines
Number of employees; training hours
Units handled; number of requisitions;
space occupied
Total labor hours
Machine hours
Interdepartmental Services
Problem
Problem
Allocating
Allocating costs
costs when
when service
service departments
departments
provide
provide services
services to
to each
each other
other
Solutions
Direct Method
Step Method
Reciprocal Method
McGrawHill/Irwin
Direct Method
Interactions
between service
departments are
ignored and all
costs are
allocated directly
to operating
departments.
McGrawHill/Irwin
Service
Department
(Cafeteria)
Operating
Department
(Machining)
Service
Department
(Custodial)
Operating
Department
(Assembly)
Direct Method Example
Departmental costs
before allocation
Number of employees
Square feet occupied
McGrawHill/Irwin
Service Departments
Operating Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
15
5,000
$ 90,000
10
2,000
$ 400,000
20
25,000
$ 700,000
30
50,000
Service
Service Department
Department
Allocation
Allocation Base
Base
Cafeteria
Cafeteria
Custodial
Custodial
Number
Number of
of employees
employees
Square
Square feet
feet occupied
occupied

Service Departments
Cafeteria
Custodial
Machining
Assembly
Departmental costs
before allocation
$ 360,000
$ 90,000
$ 400,000
$ 700,000
Cafeteria allocation
Custodial allocation
Total after allocation
McGrawHill/Irwin
Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
(360,000)
144,000
20
$360,000
= $144,000
20 + 30
Allocation base: Number of employees
McGrawHill/Irwin
Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
144,000
216,000
(360,000)
$360,000
30
= $216,000
20 + 30

McGrawHill/Irwin
Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
144,000
216,000
(360,000)
(90,000)
$
25,000
$90,000
25,000 + 50,000
30,000
$ 574,000
= $30,000
Allocation base: Square feet occupied

McGrawHill/Irwin
Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
144,000
216,000
30,000
60,000
$ 574,000
$ 976,000
(360,000)
(90,000)
$
50,000
$90,000
25,000 + 50,000
= $60,000

McGrawHill/Irwin
Step Method
Once a service
departments costs
are allocated,
other service
department costs
are not allocated
back to it.
McGrawHill/Irwin
Service
Department
(Cafeteria)
Operating
Department
(Machining)
Service
Department
(Custodial)
Operating
Department
(Assembly)
Step Method
There are three key points to understand
regarding the step method:
In both the direct and step 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.
McGrawHill/Irwin
Step Method Example

We will use the same data used
in the direct method example.
Departmental costs
before allocation
Number of employees
McGrawHill/Irwin
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
15
5,000
$ 90,000
10
2,000
$ 400,000
20
25,000
$ 700,000
30
50,000
Service Department
Allocation Base
Cafeteria
Custodial
Number of employees
Step Method Example

Service Departments
Cafeteria
Custodial
Machining
Assembly
Departmental costs
before allocation
$ 360,000
$ 90,000
$ 400,000
$ 700,000
Allocate
Allocate Cafeteria
Cafeteria costs
costs first
first since
since
itit provides
provides more
more service
service than
than Custodial.
Custodial.
McGrawHill/Irwin
Step Method Example
Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
(360,000)
60,000
10
$360,000
10 + 20 + 30
= $60,000

McGrawHill/Irwin
Step Method Example
Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
60,000
120,000
(360,000)
20
$360,000
10 + 20 + 30
= $120,000

McGrawHill/Irwin
Step Method Example
Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
60,000
120,000
180,000
(360,000)
30
$360,000
10 + 20 + 30
= $180,000

McGrawHill/Irwin
Step Method Example
Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
60,000
120,000
180,000
(360,000)
(150,000)
$
New total = $90,000 original Custodial cost

plus $60,000 allocated from the Cafeteria.
McGrawHill/Irwin
Step Method Example
Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
60,000
120,000
180,000
(150,000)
50,000
$ 570,000
(360,000)
25,000
$150,000
25,000 + 50,000
= $50,000

McGrawHill/Irwin
Step Method Example
Departmental costs
before allocation
Service Departments
Cafeteria
Custodial
Machining
Assembly
$ 360,000
$ 90,000
$ 400,000
$ 700,000
60,000
120,000
180,000
(150,000)
50,000
100,000
$ 570,000
$ 980,000
(360,000)
50,000
$150,000
25,000 + 50,000
= $100,000

McGrawHill/Irwin
Reciprocal Method
Interdepartmental
services are given
full recognition
rather than partial
recognition as with
the step method.
Service
Department
(Cafeteria)
Operating
Department
(Machining)
Service
Department
(Custodial)
Operating
Department
(Assembly)
Because of its mathematical complexity,

the reciprocal method is rarely used.
McGrawHill/Irwin
Revenue Producing
Service Departments
If a service department
generates revenue, such as a
cafeteria that charges for the service it
provides, the revenue generated should
be offset against the costs incurred.
Only the remaining net amount
of costs should be allocated
to other departments.
McGrawHill/Irwin
Quick Check Data

for Direct and Step Methods
Service Departments
Departmental costs
before allocation
Number of employees
Number of PCs
ADMIN
BACS
Accounting
Others
$ 180,000
15
12
$ 90,000
5
20
$ 190,000
20
18
$ 900,000
80
102
The direct method of allocation is used.

Allocation bases:
Business school administration costs (ADMIN):
Number of employees
Business
Administration computer services

(BACS): Number of personal computers
McGrawHill/Irwin
Quick Check
How
How much
much cost
cost will
will be
be allocated
allocated from
from
Administration
Administration to
to Accounting?
Accounting?
a.
a. $$ 36,000
36,000
b.
b. $144,000
$144,000
c.
c. $180,000
$180,000
d.
d. $$ 27,000
27,000
McGrawHill/Irwin
Quick Check
How
How much
much cost
cost will
will be
be allocated
allocated from
from
Administration
Administration to
to Accounting?
Accounting?
a.
a. $$ 36,000
36,000
b.
b. $144,000
$144,000
Service Departments
c.
c. $180,000
$180,000
ADMIN
BACS
Accounting
Others
d.
$
27,000
d. $ 27,000
Departmental
costs
before allocation
ADMIN allocation
$ 180,000
(180,000)
$ 90,000
$ 190,000
36,000
$ 900,000
144,000
20
$180,000
= $36,000
20 + 80
McGrawHill/Irwin
Quick Check
How
How much
much total
total cost
cost will
will be
be allocated
allocated from
from
ADMIN
ADMIN and
and BACS
BACS combined
combined to
to the
the
Accounting
Accounting Department?
Department?
a.
a. $$ 52,500
52,500
b.
b. $135,000
$135,000
c.
c. $270,000
$270,000
d.
d. $$ 49,500
49,500
McGrawHill/Irwin
Service Departments
Quick
Check Operating Departments
ADMIN
BACS
Accounting
Others
Departmental costs
before allocation
$ 180,000 $ 90,000
$ 190,000 $ 900,000
ADMIN
allocation
(180,000)
36,000 from
How
much
cost
How
much total
total
cost will
will be
be allocated
allocated
from144,000
BACS allocation
(90,000)
13,500
76,500
ADMIN
ADMIN and
and BACS
BACS combined
combined to
to the
the
Total after allocation $
$
$ 239,500
Accounting
Department?
a.
a. $$ 52,500
52,500
b.
b. $135,000
$135,000
c.
c. $270,000
$270,000
d.
d. $$ 49,500
49,500
$90,000
McGrawHill/Irwin
$ 1,120,500
18
= $13,500
18 + 102
Quick Check Data

Service Departments
Departmental costs
before allocation
Number of employees
Number of PCs
ADMIN
BACS
Accounting
Others
$ 180,000
15
12
$ 90,000
5
20
$ 190,000
20
18
$ 900,000
80
102
The step method of allocation is used.

Allocation bases:
Business school administration costs (ADMIN):
Number of employees
Business
administration computer services

(BACS): Number of personal computers
McGrawHill/Irwin
Quick Check
How
How much
much total
total cost
cost will
will be
be allocated
allocated from
from
ADMIN
ADMIN and
and BACS
BACS combined
combined to
to the
the
Accounting
Department?
a.
a. $35,250
$35,250
b.
b. $49,072
$49,072
c.
c. $18,000
$18,000
d.
d. $26,333
$26,333
McGrawHill/Irwin
Quick Check
How
How much
much total
total cost
cost will
will be
be allocated
allocated from
from
ADMIN
ADMIN and
and BACS
BACS combined
combined to
to the
the
Accounting
Department?
a.
a. $35,250
$35,250
b.
b. $49,072
$49,072
c.
c. $18,000
$18,000 Service Departments Operating Departments
BACS
Accounting
Others
d.
d. $26,333
$26,333 ADMIN
Departmental costs
before allocation
ADMIN allocation
BACS allocation

McGrawHill/Irwin
$ 180,000
(180,000)
-
$ 90,000
8,571
(98,571)
$ 190,000
34,286
14,786
$ 239,071
$ 1,120,929
900,000
137,143
83,786
Allocating Costs by Behavior
When possible,
variable and fixed
service department costs
should be allocated
separately.
McGrawHill/Irwin

Variable service
department costs should be
allocated to consuming departments
according to the activity
causing incurrence
of the cost.
McGrawHill/Irwin

Allocate
Allocate fixed
fixed service
service department
department costs
costs to
to
consuming
consuming departments
departments in
in predetermined
predetermined
lump-sum
lump-sum amounts
amounts that
that are
are based
based on
on the
the
consuming
consuming departments
departments peak
peak or
or long-run
long-run
average
average needs.
needs. Fixed
Fixed cost
cost allocations:
allocations:
Are based on amounts of
capacity each consuming
department requires.
McGrawHill/Irwin
Should not vary from

period to period.
Budgeted variable
and fixed service department
costs should be allocated to
operating departments.
McGrawHill/Irwin
IfIf variable
variable cost
cost allocations
allocations are
are made
made at
at the
the
beginning
beginning of
of the
the year,
year, the
the budgeted
budgeted variable
variable
rate
rate should
should be
be multiplied
multiplied by
by the
the budgeted
budgeted
activity
activity level
level of
of each
each consuming
consuming department.
department.
Allocations made
at the beginning of the
year provide data for
pricing and other
decisions.
McGrawHill/Irwin
IfIf variable
variable cost
cost allocations
allocations are
are made
made at
at the
the
end
end of
of the
the year,
year, the
the budgeted
budgeted variable
variable
rate
rate should
should be
be multiplied
multiplied by
by the
the actual
actual
activity
activity level
level of
of each
each consuming
consuming department.
department.
Allocations made at
the end of the year provide
data for performance
evaluation.
McGrawHill/Irwin
SimCo: An Example
SimCo 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:
Operating
Departments
Cutting
Assembly
Total hours
Percent of
Peak-Period
Capacity
Required
60%
40%
100%
Hours
Planned
75,000
50,000
125,000
Hours
Used
80,000
40,000
120,000
Allocate maintenance costs to the two operating departments.

McGrawHill/Irwin
SimCo: Beginning of the Year

Hours planned
Cutting
Department
Variable cost allocation:
$0.60 75,000 hours
$0.60 50,000 hours
Fixed cost allocation:
Assembly
Department
45,000
$
30,000
Total allocated cost
McGrawHill/Irwin
SimCo: Beginning of the Year

Hours planned
Cutting
Department
$0.60 75,000 hours
$0.60 50,000 hours
60% of $200,000
40% of $200,000
Assembly
Department
45,000
$
30,000
80,000
110,000
120,000
$
165,000
Percent of peak-period capacity.

McGrawHill/Irwin
SimCo: End of the Year

Hours used
Cutting
Department
$0.60 80,000 hours
$0.60 40,000 hours
Assembly
Department
48,000
$
24,000
McGrawHill/Irwin
SimCo: End of the Year

Hours used
Cutting
Department
$0.60 80,000 hours
$0.60 40,000 hours
60% of $200,000
40% of $200,000
Assembly
Department
48,000
$
24,000
80,000
104,000
120,000
$
168,000
Percent of peak-period capacity.

McGrawHill/Irwin
SimCo: Comparison of Results
Allocation Based on
Beginning-of-Period
Planned Activity
Cutting
Assembly
Cost
Type
Variable
Fixed
Allocation Based on
End-of-Period
Actual Activity
Cutting
Assembly
$ 45,000
$ 30,000
$ 48,000
$ 24,000
120,000
80,000
120,000
80,000
$ 165,000
$ 110,000
$ 168,000
$ 104,000
Fixed
Fixed cost
cost allocations
allocations are
are the
the same
same at
at the
the
end
end and
and at
at the
the beginning
beginning because
because they
they are
are
based
based on
on capacity
capacity instead
instead of
of usage.
usage.
McGrawHill/Irwin
SimCo: Comparison of Results

Only budgeted variable and fixed service
department costs were allocated to the
two operating departments.
The cost of service department inefficiencies,
contained in the actual costs, should not
be passed along to operating departments.
McGrawHill/Irwin
Quick Check:
Foster City has an ambulance service that is used
by the two public hospitals in the city. Variable
ambulance costs are budgeted at $4.20 per mile.
Fixed ambulance costs are budgeted at $120,000
per year. Data relating to the current year are:
Hospitals
Mercy
Northside
Total
McGrawHill/Irwin
Percent of
Peak-Period
Capacity
Required
45%
55%
100%
Miles
Planned
15,000
17,000
32,000
Miles
Used
16,000
17,500
33,500
Quick Check
How
How much
much ambulance
ambulance service
service cost
cost will
will be
be
allocated
allocated to
to Mercy
Mercy Hospital
Hospital at
at the
the beginning
beginning
of
of the
the year?
year?
a.
a. $117,000
$117,000
b.
b. $254,400
$254,400
c.
c. $114,480
$114,480
d.
d. $119,250
$119,250
McGrawHill/Irwin
Quick Check
How
How much
much ambulance
ambulance service
service cost
cost will
will be
be
allocated
allocated to
to Mercy
Mercy Hospital
Hospital at
at the
the beginning
beginning
of
of the
the year?
year?
a.
a. $117,000
$117,000
b.
b. $254,400
$254,400
Mercy
Northside
Variable
cost allocation:
c.
$114,480
c.
$114,480
$4.20 15,000 miles
$
63,000
d.
$4.20 17,000 miles
$
71,400
d. $119,250
$119,250
Fixed cost allocation
45% of $120,000
55% of $120,000
McGrawHill/Irwin
54,000
$
117,000
66,000
137,400
Quick Check
How
How much
much ambulance
ambulance service
service cost
cost will
will be
be
allocated
allocated to
to Mercy
Mercy Hospital
Hospital at
at the
the end
end of
of the
the
year?
year?
a.
a. $114,000
$114,000
b.
b. $118,800
$118,800
c.
c. $110,400
$110,400
d.
d. $121,200
$121,200
McGrawHill/Irwin
Quick Check
Mercy
Northside

$4.20 16,000 miles
$
67,200
$4.20
17,500
miles
$ will
73,500
How
much
ambulance
service
cost
be
How
much
ambulance
service
cost
will
be
Fixed cost allocation
allocated
to
at
allocated
to Mercy
Mercy Hospital
Hospital54,000
at the
the end
end of
of the
the
45% of $120,000
year?
55% of $120,000
66,000
year?
$ 121,200
$ 139,500
a.
a. $114,000
$114,000
b.
b. $118,800
$118,800
c.
c. $110,400
$110,400
d.
d. $121,200
$121,200
McGrawHill/Irwin
Effect of Allocations on
Once
Once service
service department
department cost
cost
allocations
allocations are
are completed,
completed, they
they are
are
included
included in
in operating
operating departments:
departments:
Performance
Performance
evaluations
evaluations
McGrawHill/Irwin
Profitability
Profitability
determination
determination
Overhead
Overhead rate
rate
computations
computations
Service
Department
(Cafeteria)
Service
Department
(Accounting)
Service
Department
(Personnel)
McGrawHill/Irwin
First Stage Allocations

Service department costs are
allocated to operating departments.
Operating
Department
(Machining)
Operating
Department
(Assembly)
The
Products
Service
Department
(Cafeteria)
Service
Department
(Accounting)
Service
Department
(Personnel)
McGrawHill/Irwin
Second Stage Allocations

Operating department overhead costs and
allocated service department costs are
applied to products.
Operating
Department
(Machining)
Operating
Department
(Assembly)
The
Products
Allocation Pitfalls to Avoid
Pitfall 1
Allocating fixed
costs using a variable
allocation base
McGrawHill/Irwin
Result
Fixed costs
allocated to one
department are
heavily influenced by
what happens in
other departments.
Kolby Products: An Example

Kolby
Kolby Products
Products has
has two
two sales
sales territories,
territories,
the
the Eastern
Eastern Territory
Territory and
and the
the Western
Western Territory.
Territory.
Both
Both sales
sales territories
territories are
are serviced
serviced by
by one
one auto
auto
service
service center
center whose
whose costs
costs are
are all
all fixed.
fixed. Contrary
Contrary
to
to good
good practice,
practice, Kolby
Kolby allocates
allocates the
the fixed
fixed service
service
center
center costs
costs to
to the
the sales
sales territories
territories on
on the
the basis
basis
of
of actual
actual miles
miles driven
driven (a
(a variable
variable base).
base).
McGrawHill/Irwin
Kolby Products: An Example

Year 1
$ 120,000
Year 2
$ 120,000
Miles driven
Western sales territory
Eastern sales territory
1,500,000
1,500,000
1,500,000
900,000
Total miles driven
3,000,000
2,400,000
Auto service center costs (all fixed)
Allocation rate per mile
0.04
0.05
$120,000 3,000,000 miles

$120,000 2,400,000 miles
McGrawHill/Irwin
Kolby Products:
Firstyear Allocations
Western
Western sales
salesterritory
territory
1,500,000
1,500,000 miles
miles @
@ $0.04
$0.04 per
per mile
mile
$$
Eastern
Eastern sales
salesterritory
territory
1,500,000
1,500,000 miles
miles @
@ $0.04
$0.04 per
per mile
mile
Total
Total cost
cost allocated
allocated
60,000
60,000
60,000
60,000
$$ 120,000
120,000
The two sales territories share the service

centers costs equally because the miles
driven in each territory are equal.
McGrawHill/Irwin
Kolby Products:
Secondyear Allocation
Western
Western sales
salesterritory
territory
1,500,000
1,500,000 miles
miles @
@ $0.05
$0.05 per
per mile
mile
Eastern
Eastern sales
salesterritory
territory
900,000
900,000 miles
miles @
@ $0.05
$0.05 per
per mile
mile
Total
Total cost
cost allocated
allocated
$$
75,000
75,000
45,000
45,000
$$ 120,000
120,000
Western territory has the same number of miles as

last year, but $15,000 more cost allocated
because Easterns miles declined in year 2.
McGrawHill/Irwin
Allocation Pitfalls to Avoid
Pitfall 2
Using sales
dollars as an
allocation base
Result
Sales of one department
influence the service
department costs
allocated to other
departments.
McGrawHill/Irwin
Clothier Inc. An Example

Clothier
Clothier Inc.,
Inc., aa mens
mens clothing
clothing store
store has
has one
one
service
service department
department and
and three
three sales
sales departments,
departments,
Suits,
Suits, Shoes,
Shoes, and
and Accessories.
Accessories. Service
Service department
department
costs
costs total
total $60,000
$60,000 for
for both
both years
years in
in the
the example.
example.
Contrary
Contrary to
to good
good practice,
practice, Clothier
Clothier allocates
allocates the
the
service
service department
department costs
costs based
based on
on sales.
sales.
McGrawHill/Irwin
Clothier Inc. First-year Allocation
$260,000 $400,000
65% of $60,000
In
In the
the next
next year,
year, the
the manager
manager of
of the
the Suit
Suit Department
Department
increased
increased sales
sales by
by $100,000.
$100,000. Sales
Sales in
in the
the other
other departments
departments
are
are unchanged.
unchanged. Lets
Lets allocate
allocate the
the $60,000
$60,000 service
service department
department
cost
cost for
for the
the second
second year
year given
given the
the sales
sales increase.
increase.
McGrawHill/Irwin
Clothier Inc. Second-year Allocation
$360,000 $500,000
72% of $60,000
IfIf you
you were
were the
the suit
suit department
department manager,
manager, would
would
you
you be
be happy
happy with
with the
the increased
increased service
service department
department
costs
costs allocated
allocated to
to your
your department?
department?
McGrawHill/Irwin
End of Chapter 15
McGrawHill/Irwin

Cost Allocation Lesson

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Cost Allocation Lesson

Uploaded by

Copyright:

Available Formats

11th Edition

Reasons for Allocating Service

Selecting Allocation Bases

Selecting Allocation Bases

Examples of Allocation Bases

Direct Method Example

Direct Method Example

Direct Method Example

Direct Method Example

Allocation base: Number of employees

Direct Method Example

Allocation base: Square feet occupied

Direct Method Example

Allocation base: Square feet occupied

the allocation base attributable to the service

Step Method Example

Step Method Example

Step Method Example

Allocation base: Number of employees

Step Method Example

Allocation base: Number of employees

Step Method Example

Allocation base: Number of employees

Step Method Example

New total = $90,000 original Custodial cost

Step Method Example

Allocation base: Square feet occupied

Step Method Example

Allocation base: Square feet occupied

Because of its mathematical complexity,

Quick Check Data

The direct method of allocation is used.

Administration computer services

Quick Check Data

The step method of allocation is used.

administration computer services

Total after allocation

Allocating Costs by Behavior

Allocating Costs by Behavior

Allocating Costs by Behavior

Should not vary from

Allocating Costs by Behavior

Allocating Costs by Behavior

Allocating Costs by Behavior

Allocate maintenance costs to the two operating departments.

SimCo: Beginning of the Year

Total allocated cost

SimCo: Beginning of the Year

Percent of peak-period capacity.

SimCo: End of the Year

Total allocated cost

SimCo: End of the Year

Percent of peak-period capacity.

SimCo: Comparison of Results

SimCo: Comparison of Results

Variable cost allocation:

First Stage Allocations

Second Stage Allocations

Allocation Pitfalls to Avoid

Kolby Products: An Example

Kolby Products: An Example

Total miles driven

Auto service center costs (all fixed)

Allocation rate per mile