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CHAPTER 7 ALLOCATING COSTS OF SUPPORT DEPARTMENTS AND JOINT PRODUCTS Allocation of support center costs is an important topic for product costing. In recent years, the issue of accurate product costing has assumed considerable importance. Managers need to be fully aware of how products are costed and the limitations associated with those assignments. The chapter also addresses joint product costing. Joint production processes are common in the real world. Oil production is an excellent example. Large amounts of money are expended to extract oil from the ground. When the oil goes to the refinery, several different products are produced from the raw crude oil. LEARNING OBJECTIVES After studying Chapter 7, you should be able to: 1. Describe the difference between support departments and producing departments. 2. Calculate charging rates, and distinguish between single and dual charging rates. 3. Allocate support center costs to producing departments using the direct method, the sequential method, and the reciprocal method. 4. Calculate departmental overhead rates. 5. Identify the characteristics of the joint production process, and allocate joint costs to products. KEY TOPICS The following major topics are covered in this chapter (related learning objectives are listed for each topic): 1. An Overview of Cost Allocation and Objectives of Allocation (LO 1) 2. Allocating One Department’s Costs to Another Department (LO 2) 3. Choosing a Support Department Cost Allocation Method (LO 3) 4. Departmental Overhead Rates and Product Costing (LO 4) 5. Accounting for Joint Production Processes (LO 5) I. COST ALLOCATION A. Overview In earlier chapters, we discussed factory overhead allocation. That discussion was simplified by the fact that factory overhead costs in a producing department were always a given amount. Chapter 7 asks us to step back and trace these factory overhead costs from incurrence through assignment to the units produced during the period. Support departments are units within an organization that provide essential support services for producing departments. Some examples of support departments include maintenance, grounds, engineering, housekeeping, personnel, and stores. Producing departments are units within an organization that are directly responsible for creating the products and services sold to customers. Examples of producing departments for manufacturing companies include cutting, assembly, and finishing
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. Examples of producing departments for an accounting firm (a service company) include auditing, tax, and management advisory services. Exhibit 7-1 (p. 211) provides examples of departmentalization for a manufacturing firm and a service firm. Exhibit 7-2 (p. 212) provides the steps required to allocate support department costs to a producing
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