Session 13 - Accounting 102 Session 13 Allocating the Costs...

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Accounting 102 Session 13
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Allocating the Costs of Interrelated Service Departments
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The situation that we are about to examine is illustrated, graphically, below Because of the exchange of services (interaction) between the service departments, each operating department use the services provided by each service department in two ways: 1) Directly, i.e., when the manufacturing operation uses IT services 2) Indirectly, i.e. when the manufacturing operation uses Accounting services which, in turn, uses IT services to support its operations
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Allocating the Costs of Interrelated Departments There are three methods that are used to allocate the costs of a support department when 1) there are two or more support departments, and 2) the support departments provide services to each other as well as to operating departments: A. Direct Method - Ignores any service provided by one support department to another B. Step-Down Method –G ives partial recognition of services rendered among support departments C. Reciprocal Method - Explicitly takes into account all services rendered
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10 hrs 11 hrs $24 Total 4 2 4 Hours of Sup2 service budgeted 4 5 2 Hours of Sup1 service budgeted $15 $9 Budgeted variable costs Op2 Op1 Sup2 Sup1 Operating Dept. Support Dept. Example We’ll use the data below to illustrate each of these allocation methods Note that the operating departments may be involved in the manufacture of product. In that case, any support department costs allocated to them would be (re)allocated to the product (using job or product costing methods). Alternatively, the operating departments may be selling or administrative departments. In that case, any support department costs allocated to them would be expensed.
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The Direct Method The direct method ignores all relationships among support departments , and allocates costs to operating departments pro-rata, based only on their use of support services.
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4 4 5 2 2 4 Budgeted use – Sup1 Budgeted use – Sup 2 $15 $9 Budgeted variable costs Op2 Op1 Sup2 Sup1 Operating Dept. Support Dept. -$9 $9 x ( 5 ) = $5 9 $9 x ( 4 ) = $4 9 -$15 15 x ( 2 ) = $5 6 15 x ( 4 ) = $10 6 $0 $0 $10 $14 Allocation from Sup1 Allocation from Sup2 TOTAL $24.00 Using the information provided, the Direct Method would result in the following allocation of Support Department costs to the Operating Departments:
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The Step Down Method • Support costs are allocated to other support departments and to operating departments in a way that partially recognizes the mutual services provided among all support departments • It takes into account only one-way interactions among support departments.
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This note was uploaded on 10/06/2010 for the course FNCE 100 taught by Professor Jaffe during the Spring '10 term at UNC Asheville.

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Session 13 - Accounting 102 Session 13 Allocating the Costs...

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