ch07tc - COST MANAGEMENT Accounting & Control...

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COST MANAGEMENT 1 Hansen▪Mowen▪Guan Chapter 7 Allocating Costs of Support Departments and Joint Products
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2 Study Objectives 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.
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3 An Overview of Cost Allocation Allocation is dividing a pool of costs and assigning those costs to subunits The cost objects must be determined Cost objects are usually departments Producing: creating products sold to customers Support: provide essential services for producing departments
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4 Departmentalization: Manufacturing Firm
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5 Departmentalization: Service Firm
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6 Allocating Support Department Costs to Producing Departments Departmentalize the firm Classify each department as support or producing Trace all overhead costs in the firm to the appropriate department Allocate support department costs to producing departments Calculate predetermined overhead rate for producing departments Allocate overhead to units produced Steps:
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7 An Overview of Cost Allocation
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8 Allocating One Department’s Costs to Another Department The costs of a support department are often allocated through the use of a charging rate . Major factors of rate selection: Choice of single or dual rate Use of budgeted or actual support department costs.
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9 Allocating One Department’s Costs to Another Department Developing a fixed rate Determine budgeted fixed costs Compute allocation ratio Allocate Developing the variable rate Depends on the costs that change as the activity driver changes Fixed costs + estimated variable costs Single = rate estimated usage Dual rate: Fixed rate and a variable rate
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Allocating One Department’s Costs to Another Department When allocating support department costs, should actual or budgeted costs be allocated? Answer: Budgeted – to prevent the
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ch07tc - COST MANAGEMENT Accounting & Control...

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