Why are the support department costs allocated to the production departments? ✅ Tốt
Thủ Thuật Hướng dẫn Why are the support department costs allocated to the production departments? Mới Nhất
Bùi Thị Vân Thiện đang tìm kiếm từ khóa Why are the support department costs allocated to the production departments? được Update vào lúc : 2022-12-19 15:00:21 . Với phương châm chia sẻ Bí quyết về trong nội dung bài viết một cách Chi Tiết 2022. Nếu sau khi đọc tài liệu vẫn ko hiểu thì hoàn toàn có thể lại Comment ở cuối bài để Mình lý giải và hướng dẫn lại nha.In prior chapters, we discussed factory overhead allocation. However, we took the existence of factory overhead cost in a producing department as a given. This chapter asks us to step back and trace these factory overhead costs from incurrence through assignment to units produced.
Nội dung chính Show- B. Types of DriversC. Objectives of Assigning Support Department CostsA. A Single Charging RateB. Multiple Charging RatesCornerstone 14-2: How to Calculate and Assign Service Costs Using Multiple Charging RatesC. Assigning Budget versus Actual Service CostsA. Direct Method of AllocationCornerstone 14-3: How to Assign Support Department Costs Using the Direct MethodB. Sequential Method of AllocationDepartment Costs Using the Sequential MethodC. Reciprocal Method of AllocationCornerstone 14-5: How to Calculate and Use Departmental Overhead RatesWhy support costs are allocated to departments?What is support department cost allocation?When companies allocate support department costs only to the producing departments what method of allocation are they using?What is the main reason of cost allocation?
Use the opening scenario to introduce the concept of the two categories of departments: support departments and producing departments. Each type of department should be defined, and it should be indicated that this chapter is primarily concerned with describing ways of allocating support-department costs to producing departments.
A. Types of Departments
If departments are the cost objects, departments are classified as either producing departments or support departments.
Definition:
responsible for creating the products
or services sold to customers
provide support services for producing departments
Examples:
assembly department, finishing department
maintenance, personnel, security
Although support departments do not work directly on the products of an organization, the costs of providing these support services are part of the total product cost.
Three steps in allocating costs are:
1. trace all overhead costs to a support or producing department
2. allocate support-department costs to the producing departments, and
3. allocate overhead costs to units of individual products using a predetermined overhead rate. The predetermined overhead rate is calculated as follows:
Note that a producing department’s overhead consists of two parts:
- overhead directly associated with the producing departmentoverhead allocated to the producing department from the support departments
In addition, Hansen and Mowen state that some basic guidelines should be followed when allocating support-department costs. These guidelines are essentially compatible with the five objectives.
1. As nearly as possible, cost drivers (causal factors) should be used as the basis for cost allocation.
2. Budgeted or expected costs, not actual costs, should be allocated.
3. Costs should be allocated by behavior; fixed costs and variable costs should be allocated separately.
B. Types of Drivers
- Causal factors are cost drivers within a producing department that cause or drive the consumption of support service costs.In general, causal factors should be used as the basis for allocating service costs.For example, if power costs were to be allocated, kilowatt hours would be the cost driver or causal factor that could be used as the allocation base.
C. Objectives of Assigning Support Department Costs
- The major objectives associated with the allocation of support-department costs to producing departments and ultimately to specific products are:to obtain a mutually agreeable priceto compute product-line profitabilityto predict economic effects of planning and controlto value inventoryto motivate managers
2. ASSIGNING DEPARTMENT COSTS TO PRODUCING DEPARTMENTS
- A charging rate is used to allocate the costs of a support department to user departments.
A. A Single Charging Rate
- If a single charging rate is used, fixed costs and variable costs are combined and then divided by estimated activity.
- The amount charged to producing departments is calculated as follows:
Single charging rate × Producing department usage
- Two reasons for allocating support-department costs are:
1. for product costing (to determine the cost of units produced), and
2. for performance evaluation.
For product costing, the allocation is made the beginning of the year based on budgeted usage so that a predetermined overhead rate can be computed to cost products during the year.For performance evaluation purposes, the allocation is made the end of the period based on actual usage.
Usage:
Budgeted usage
Actual usage
Service department allocation:
Budgeted rate × Budgeted usage
Budgeted rate × Actual usage
Cornerstone 14-1: How to Calculate and Use a Single Charging Rate
- See Mowen and Hansen text for in-class, demo problems.
B. Multiple Charging Rates
- Instead of using a single charging rate, a company may break support department resources and causal factors into multiple charging rates.For example, two rates may be used to assign support department costs:
- one rate for variable costs (based on actual usage), andone rate for fixed costs (based on planned peak usage).
Cornerstone 14-2: How to Calculate and Assign Service Costs Using Multiple Charging Rates
- See Mowen and Hansen text for in-class, demo problems.
C. Assigning Budget versus Actual Service Costs
- Budgeted, not actual, costs should be allocated so that support departments’ efficiencies or inefficiencies are not passed on to the producing departments.A general principle of performance evaluation is that managers should not be held responsible for costs or activities over which they have no control.
3. CHOOSING A SUPPORT DEPARTMENT COST ALLOCATION METHOD
There are three methods commonly used to allocate support costs: (1) the direct method; (2) the sequential (or step) method; and (3) the reciprocal method. Many instructors choose to defer coverage of the reciprocal method to cost accounting. It is important for students to realize that no matter which method of support department cost allocation is used, total factory overhead costs remain unchanged. That is, the different allocation methods simply split up the costs differently among the producing departments.
Three methods used to allocate support-department costs to producing departments are:
1. direct method
2. sequential method, and
3. reciprocal method.
A. Direct Method of Allocation
- The direct method allocates support-department costs directly to the producing departments based on relative use.This method ignores reciprocal services (services provided by one support department to another support department). For example, this method would ignore service provided by the data processing department to other support departments, such as personnel or maintenance.
Cornerstone 14-3: How to Assign Support Department Costs Using the Direct Method
- See Mowen and Hansen text for in-class, demo problems.
B. Sequential Method of Allocation
- The sequential (or step) method allocates support-department costs to the producing depart ments an d to some support departments. Thus, the sequential method partially recognizes reciprocal services.The sequential method is applied in the following manner:
1. Select a support department and allocate its costs to the producing departments and support departments to which it provides services. (The support department with the greatest total costs is allocated first.)
2. Select another support department and allocate its cost to the producing departments and the remaining support departments.
3. Proceed in this manner until all of the support-department costs have been allocated to the producing departments.
- Notice that once the costs of a support department are allocated, no further allocations are made to that support department.
Cornerstone 14-4: How to Assign Support
- See Mowen and Hansen text for in-class, demo problems.
Department Costs Using the Sequential Method
- See Mowen and Hansen text for in-class, demo problems.
C. Reciprocal Method of Allocation
- The reciprocal method fully recognizes the reciprocal services provided by support departments to other support departments.The reciprocal method requires the use of simultaneous equations.The total cost of a support department is calculated:
Total cost of support department = Direct costs + Allocated costs of other support departments
- The reciprocal method fully recognizes the reciprocal services provided by support departments to other support departments.
4. DEPARTMENTAL OVERHEAD RATES AND PRODUCT COSTING
When all costs are allocated from the support departments to the production departments, overhead rates can be calculated for each production department. These calculations are similar to overhead calculations discussed in earlier chapters.
Support-department costs are allocated to the producing departments, and then the support-department costs are included in the producing departments’ overhead application rates.
The flow of costs could be diagramed as follows:
Support Department CostsProducing DepartmentOverhead CostsUnits of Product$400,000$200,000$200,000$600,000
The $600,000 of producing department overhead would be allocated to units of product using a cost driver such as direct labor hours or machine hours.
Cornerstone 14-5: How to Calculate and Use Departmental Overhead Rates
- See Mowen and Hansen text for in-class, demo problems.
SUMMARY
To summarize, the four steps involved in support-department allocation are as follows:
1. Prepare departmental budgets for producing and support departments.
2. Select an allocation base for use in allocating the support-department costs.
3. Allocate the budgeted support-department costs to the producing departments using either the direct, sequential, or reciprocal method.
4. Calculate a predetermined overhead application rate for each producing department to apply total overhead costs to units of product produced
Why support costs are allocated to departments?
The costs of service departments are allocated to the operating departments because they exist to support the operating departments. Examples of service departments are maintenance, administration, cafeterias, laundries, and receiving.What is support department cost allocation?
The costs allocated from a support department are its direct costs plus any costs it receives in allocations from other support departments. 2. Sequential allocation may be more accurate than the direct method because it recognizes some interactions among the support departments.When companies allocate support department costs only to the producing departments what method of allocation are they using?
Direct Method of Allocation. The direct method allocates support-department costs directly to the producing departments based on relative use. This method ignores reciprocal services (services provided by one support department to another support department).What is the main reason of cost allocation?
Cost allocation is the method business owners use to calculate profitability for the purpose of financial reporting. To ensure the business's finances are on track, costs are separated, or allocated, into different categories based on the area of the business they impact. Tải thêm tài liệu liên quan đến nội dung bài viết Why are the support department costs allocated to the production departments?