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Unformatted text preview: ACC550 CHAPTER 15 ALLOCATION OF SUPPORT DEPT COSTS, COMMON COSTS & REVENUES Allocating support department costs 1) Support departments provide direct support to a) Operating divisions or departments b) Other support departments 2) The divisions and departments receiving the support are the cost objects. 3) Examples of support departments a) A corporate computer facility and a corporate payroll department provide support to divisions. b) A division boiler room and maintenance department provide support to the division manufacturing department. 4) Single versus dual rate allocations a) Single rate allocations i) Fixed and variable costs within each cost pool are combined and allocated to cost objects using a single rate. b) Dual rate allocations i) Costs within each cost pool are allocated to cost objects using separate rates for the fixed and variable cost components. 5) Budget versus actual costs a) Variable cost may be allocated to cost objects using either budget or actual variable cost PER UNIT. b) Fixed costs may be allocated to cost objects using either budget or actual TOTAL fixed costs. c) When budget costs are used, the support department assumes all the risks and benefits of actual cost variances. d) When actual costs are used, the cost objects assume the risks and benefits of actual cost variances. 6) Budget versus actual usage a) Total fixed costs (either budget or actual) may be allocated to cost objects using either budget or actual activity usage. b) When budget usage is used, actual usage variations do not affect the amount of fixed costs allocated to each cost object. i) Each cost object gets the same PERCENTAGE of fixed costs as reflected in the static budget. c) When actual usage is used, actual usage variations do affect the amount of fixed costs allocated to each cost object. i) The percentage of fixed costs allocated to each cost object per the static budget is recalculated based on actual usage. 7) Practical capacity a) The fixed cost allocation rate may be calculated using practical capacity or master budget capacity. b) When practical capacity is used i) The fixed cost allocation rate is lower than the master budget capacity rate. ii) The cost of unused capacity remains within the support department and is not allocated to cost objects. Expanded discussion The concept of support departments is fairly straight forward. They are departments that exist to provide support to divisions and other departments. The divisions and departments that receive the support represent the cost objects of our allocations; we want to allocate support department costs to the cost objects they support. As we have seen, a number of different alternatives exist for allocating service department costs. In trying to understand the alternatives, its best to discuss variable and fixed costs separately....
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- Spring '09