Chap 15 Student Outline.doc

Chap 15 Student Outline.doc - Chapter 15 Allocation of...

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Chapter 15 Allocation of Support-Department Costs, Common Costs, and Revenues Companies distinguish operating departments from support departments. An operating department, which is also called a production department, is one that directly adds value to the product or service. A support department, which is also called a service department, provides support and assists operating departments and other service departments. Allocating Support Department costs Costs incurred in the support departments must be allocated ultimately to the operating departments and eventually to the final cost object. A predetermined rate is normally utilized to make the allocations to the operating departments. Two Methods may be utilized. The single-rate method makes no distinction between fixed and variable costs . It allocates costs in each cost pool to cost objects using the same rate per unit of a single allocation base. The dual-rate method divides the costs of each support department into two pools—a variable-cost pool and a fixed-cost pool. When using either the single-rate or dual-rate method, managers may allocate costs based upon: a. Budgeted rates and budgeted hours b. Budgeted rates and actual hours c. Actual rates and actual hours—This approach is not often used in practice. Once the decision has been made regarding single- or dual-rate allocation, the manager must next turn to the issue of choosing between allocating budgeted or actual costs. When allocations are based on budgeted usage user divisions know in advance their allocated costs. This can be of benefit in short-term and long-term planning. A disadvantage of using budgeted costs is that there is an incentive for managers to underestimate their planned usage, thus being assigned a lower percentage of allocated costs.
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