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costacctg13_sm_ch15 - CHAPTER 15 ALLOCATION OF...

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Unformatted text preview: CHAPTER 15 ALLOCATION OF SUPPORT­DEPARTMENT COSTS, COMMON COSTS, AND REVENUES 15­1 The single­rate (cost­allocation) method makes no distinction between fixed costs and variable costs in the cost pool. It allocates costs in each cost pool to cost objects using the same rate per unit of the single allocation base. The dual­rate (cost­allo cat ion) method classifies costs in each cost pool into two pools—a variable­cost pool and a fixed­cost pool—wit h each pool using a different cost­allo cat ion base. 15­2 The dual­rate method provides informat ion to divisio n managers about cost behavior. Knowing how fixed costs and variable costs behave different ly is useful in decisio n making. 15­3 Budgeted cost rates motivate the manager of the supplier department to improve efficiency because the supplier department bears the r isk of any unfavorable cost variances. 15­4 Examples of bases used to allocate support department cost pools to operating departments include the number of emplo yees, square feet of space, number of hours, and machine­hours. 15­5 The use o f budgeted indirect cost allocat ion rates rather than actual indirect rates has several attractive features to the manager of a user department: a. the user knows the costs in advance and can factor them into ongoing operating cho ices, b. the cost allocated to a particular user department does not depend on the amount of resources used by other user departments, and c. inefficiencies at the department providing the service do not affect the costs allocated to the user department. 15­6 Disagree. Allocat ing costs on “the basis o f est imated long­run use by user department managers” means department managers can lower their cost allocations by deliberately underest imat ing their lo ng­run use (assuming all other managers do not similarly underest imate their usage). 15­7 The three methods differ in how they recognize reciprocal services among support departments: a. The direct (allocation) method ignores any services rendered by one support department to another; it allo cates each support department’s costs direct ly to the operating departments. b. The step­down (allocation) method allocates support­department costs to other support departments and to operating depart ments in a sequential manner that partially recognizes the mutual services provided amo ng all support departments. c. The reciprocal (allo cat ion) method allocates support­department costs to operating departments by fully recognizing the mutual services provided amo ng all support departments. 15­1 15­8 The reciprocal method is theoretically the most defensible method because it fully recognizes the mutual services provided among all departments, irrespect ive of whether those departments are operating or support departments. 15­9 The stand­alo ne cost­allocat ion method uses informat ion pertaining to each user of a cost object as a separate entit y to determine the cost­allocation weights. The incremental cost­allocat ion method ranks the individual users of a cost object in the order of users most responsible for the commo n costs and then uses this ranking to allocate costs among those users. The first­ranked user of the cost object is the primary user and is allocated costs up to the costs of the primary user as a stand­alone user. The second­ranked user is the first incremental user and is allocated the additional cost that arises from two users instead of only the primary user. The third­ranked user is the second incremental user and is allocated the addit iona l cost that arises fro m three users instead of two users, and so on. The Shapley Value method calculates an average cost based on the costs allocated to each user as first the primary user, the second­ranked user, the third­ranked user, and so on. 15­10 All contracts with U.S. government agencies must comply wit h cost accounting standards issued by the Cost Accounting Standards Board (CASB). 15­11 Areas of dispute between contracting parties can be reduced by making the “rules of the game” explicit and in writ ing at the time the contract is signed. 15­12 Companies increasingly are selling packages of products or services for a single price. Revenue allocation is required when managers in charge of developing or market ing individua l products in a bundle are evaluated using product­specific revenues. 15­13 The stand­alone revenue­allocat ion method uses product­specific informat ion on the products in the bundle as weights for allocating the bundled revenues to the individual products. The incremental revenue allocat ion method ranks individual products in a bundle according to criteria determined by management—such as the product in the bundle with the most sales—and then uses this ranking to allocate bundled revenues to the individual products. The first­ranked product is the primary product in the bundle. The second­ranked product is the first incremental product, the third­ranked product is the second incremental product, and so on. 15­14 Managers typically will argue that their individual product is the prime reason why consumers buy a bundle of products. Evidence on this argument could co me fro m the sales of the products when sold as individual products. Other pieces of evidence include surveys of users of each product and surveys o f people who purchase the bundle of products. 15­15 A dispute over allocation o f revenues of a bundled product could be reso lved by (a) having an agreement that outlines the preferred method in the case of a dispute, or (b) having a third party (such as the company president or an independent arbitrator) make a decisio n. 15­2 15­16 (20 min.) Single­rate versus dual­rate methods, support department. Bases available (kilowatt hours): Rockford Practical capacit y 10,000 Expected monthly usage 8,000 1a. Peoria 20,000 9,000 Hammond Kankakee Total 12,000 8,000 50,000 7,000 6,000 30,000 Single­rate method based on practical capacit y: Total costs in pool = $6,000 + $9,000 = $15,000 Practical capacit y = 50,000 kilowatt hours Allocat ion rate = $15,000 ÷ 50,000 = $0.30 per hour of capacit y Rockford 10,000 $3,000 Peoria 20,000 $6,000 Hammond Kankakee Total 12,000 8,000 50,000 $3,600 $2,400 $15,000 Practical capacit y in hours Costs allocated at $0.30 per hour 1b. Single­rate method based on expected monthly usage: Total costs in pool = $6,000 + $9,000 = $15,000 Expected usage = 30,000 kilowatt hours Allocat ion rate = $15,000 ÷ 30,000 = $0.50 per hour of expected usage Rockford Peoria Hammond Kankakee Total Expected monthly usage in hours 8,000 9,000 7,000 6,000 30,000 Costs allocated at $0.50 per hour $4,000 $4,500 $3,500 $3,000 $15,000 2. Variable­Cost Pool: Total costs in pool Expected usage Allocat ion rate Fixed­Cost Pool: Total costs in pool Practical capacit y Allocat ion rate = = = = = = $6,000 30,000 kilowatt hours $6,000 ÷ 30,000 = $0.20 per hour of expected usage $9,000 50,000 kilowatt hours $9,000 ÷ 50,000 = $0.18 per hour of capacit y Peoria $1,800 3,600 $5,400 Hammond Kankakee $1,400 2,160 $3,560 $1,200 1,440 $2,640 Total $ 6,000 9,000 $15,000 Rockford Variable­cost pool $0.20 × 8,000; 9,000; 7,000, 6,000 Fixed­cost pool $0.18 × 10,000; 20,000; 12,000, 8,000 Total $1,600 1,800 $3,400 The dual­rate method permits a more refined allocation of the power department costs; it permit s the use of different allocat ion bases for different cost pools. The fixed costs result from decisio ns most likely associated with the practical capacit y level. The variable costs result from decisio ns most likely associated with monthly usage. 15­3 15­17 (20–25 min.) Single­rate method, budgeted versus actual costs and quantities. 1. a. Budgeted rate = Budgeted indirect costs = $115,000/50 trips = $2,300 per round­trip Budgeted trips Indirect costs allocated to Dark C. Divisio n = $2,300 per round­trip ´ 30 budgeted round trips = $69,000 Indirect costs allocated to Milk C. Divisio n = $2,300 per round­trip ´ 20 budgeted round trips = $46,000 b. Budgeted rate = $2,300 per round­trip Indirect costs allocated to Dark C. Divisio n = $2,300 per round­trip ´ 30 actual round trips = $69,000 Indirect costs allocated to Milk C. Divisio n = $2,300 per round­trip ´ 15 actual round trips = $34,500 c. Actual rate = Actual indirect costs = $96,750/ 45 trips = $2,150 per round­trip Actual trips Indirect costs allocated to Dark C. Divisio n = $2,150 per round­trip ´ 30 actual round trips = $64,500 Indirect costs allocated to Milk C. Divisio n = $2,150 per round­trip ´ 15 actual round trips = $32,250 2. When budgeted rates/budgeted quantit ies are used, the Dark Chocolate and Milk Chocolate Divisio ns know at the start of 2009 that they will be charged a total o f $69,000 and $46,000 respectively for transportation. In effect, the fleet resource becomes a fixed cost for each divisio n. Then, each may be motivated to over­use the trucking fleet, knowing that their 2009 transportation costs will not change. When budgeted rates/actual quant it ies are used, the Dark Chocolate and Milk Chocolate Divisio ns know at the start of 2009 that they will be charged a rate of $2,300 per round trip, i.e., they know the price per unit of this resource. This enables them to make operating decisio ns knowing the rate they will have to pay for transportation. Each can st ill control its total transportation costs by minimizing the number of round trips it uses. Assuming that the budgeted rate was based on honest estimates of their annual usage, this method will also provide an estimate of the excess trucking capacit y (the portion of fleet costs not charged to either divis io n). In contrast, when actual costs/actual quant it ies are used, the two divisio ns must wait until year­ end to know their transportation charges. The use of actual costs/actual quant it ies makes the costs allocated to one divis io n a funct ion of the actual demand o f other users. In 2009, the actual usage was 45 trips, which is 5 trips below the 50 trips budgeted. The Dark Chocolate Divisio n used all the 30 trips it had budgeted. The Milk Chocolate Divisio n used only 15 of the 20 trips budgeted. When costs are allocated based on actual costs and actual quant it ies, the same fixed costs are spread over fewer 15­4 trips result ing in a higher rate than if the Milk Chocolate Divisio n had used its budgeted 20 trips. As a result, the Dark Chocolate Divisio n bears a proportionately higher share of the fixed costs. Using actual costs/actual rates also means then any efficiencies or inefficiencies of the trucking fleet get passed along to the user divis io ns. In general, this will have the effect of making the truck fleet less careful about its costs, although in 2009, it appears to have managed its costs well, leading to a lower actual cost per roundtrip relat ive to the budgeted cost per round trip. For the reasons stated above, of the three single­rate methods suggested in this problem, the budgeted rate and actual quant it y may be the best one to use. (The management of Chocolat, Inc. would have to ensure that the managers of the Dark Chocolate and Milk Chocolate divisio ns do not systemat ically overestimate their budgeted use of the fleet divisio n in an effort to drive down the budgeted rate). 15­18 (20 min.) Dual­rate method, budgeted versus actual costs, and practical capacity versus actual quantities (continuation of 15­17). 1. Charges with dual rate method. Variable indirect cost rate Fixed indirect cost rate = = = $1,500 per trip $40,000 budgeted costs/ 50 round trips budgeted $800 per trip Dark Chocolate Divisio n Variable indirect costs, $1,500 × 30 Fixed indirect costs, $800 × 30 Milk Chocolate Divisio n Variable indirect costs, $1,500 × 15 Fixed indirect costs, $800 × 20 $45,000 24,000 $69,000 $22,500 16,000 $38,500 2. The dual rate changes how the fixed indirect cost component is treated. By using budgeted trips made, the Dark Chocolate Divis io n is unaffected by changes fro m its own budgeted usage or that of other divis io ns. When budgeted rates and actual trips are used for allocat ion (see requirement 1.b. of problem 15­17), the Dark Chocolate Divisio n is assigned the same $24,000 for fixed costs as under the dual­rate method because it made the same number of trips as budgeted. However, note that the Milk Chocolate Divisio n is allocated $16,000 in fixed trucking costs under the dual­rate system, compared to $800 ´ 15 actual trips = $12,000 when actual trips are used for allocat ion. As such, the Dark Chocolate Divisio n is not made to appear disproportionately more expensive than the Milk Chocolate Divisio n simply because the latter did not make the number of trips it budgeted at the start of the year. 15­5 15­19 (30 min.) Support department cost allocation; direct and step­down methods. 1. a. Direct method costs Alloc. of AS costs (40/75, 35/75) Alloc. of IS costs (30/90, 60/90) b. Step­down (AS first) costs Alloc. of AS costs (0.25, 0.40, 0.35) Alloc. of IS costs (30/90, 60/90) c. Step­down (IS first) costs Alloc. of IS costs (0.10, 0.30, 0.60) Alloc. of AS costs (40/75, 35/75) AS IS $600,000 $2,400,000 (600,000) GOVT CORP $ 320,000 $ 280,000 1,600,000 $1,880,000 (2,400,000) 800,000 $ 0 $ 0 $1,120,000 $600,000 $2,400,000 (600,000) 150,000 $ 240,000 $ 210,000 1,700,000 $1,910,000 $ (2,550,000) 850,000 0 $ 0 $1,090,000 $600,000 $2,400,000 240,000 (2,400,000) $ 720,000 (840,000) $ 0 $ 448,000 $1,168,000 GOVT $1,120,000 1,090,000 1,168,000 $1,440,000 392,000 $1,832,000 CORP $1,880,000 1,910,000 1,832,000 0 2. Direct method Step­down (AS first) Step­down (IS first) The direct method ignores any services to other support departments. The step­down method partially recognizes services to other support departments. The informat ion systems support group (with total budget of $2,400,000) provides 10% of its services to the AS group. The AS support group (with total budget of $600,000) provides 25% of its services to the informat ion systems support group. When the AS group is allocated first, a total of $2,550,000 is the n assigned out from the IS group. Given CORP’s disproportionate (2:1) usage of the services o f IS, this method then results in the highest overall allocat ion of costs to CORP. By contrast, GOVT’s usage of the AS group exceeds that of CORP (by a ratio of 8:7), and so GOVT is assigned relat ively more in support costs when AS costs are assigned second, after they have already been incremented by the AS share of IS costs as well. 15­6 3. Three criteria that could determine the sequence in the step­down method are: a. Allocate support departments on a ranking of the percentage of their total services provided to other support departments. 1. Administrative Services 25% 2. Informat ion Systems 10% b. Allocate support departments on a ranking of the total do llar amount in the support departments. 1. Informat ion Systems $2,400,000 2. Administrative Services $ 600,000 c. Allocate support departments on a ranking of the dollar amounts of service provided to other support departments 1. Informat ion Systems (0.10 ´ $2,400,000) = $240,000 2. Administrative Services (0.25 ´ $600,000) = $150,000 The approach in (a) above typically better approximates the theoretically preferred reciprocal method. It results in a higher percentage of support­department costs provided to other support departments being incorporated into the step­down process than does (b) or (c), above. 15­20 (50 min.) Support­department cost allocation, reciprocal method (continuation of 15­19). 1a. Support Departments AS I S $600,000 $2,400,000 (861,538) 261,538 $ 0 215,385 (2,615,385) $ 0 Operating Departments Govt. Corp. Costs Alloc. of AS costs (0.25, 0.40, 0.35) Alloc. of IS costs (0.10, 0.30, 0.60) $ 344,615 784,616 $1,129,231 $ 301,538 1,569,231 $1,870,769 Reciprocal Method Computation AS = $600,000 + 0.10 IS IS = $2,400,000 + 0.25AS IS = $2,400,000 + 0.25 ($600,000 + 0.10 IS) = $2,400,000 + $150,000 + 0.025 IS 0.975IS = $2,550,000 IS = $2,550,000 ÷ 0.975 = $2,615,385 AS = $600,000 + 0.10 ($2,615,385) = $600,000 + $261,538 = $861,538 15­7 1b. Support Departments AS I S $600,000 $2,400,000 (600,000) 150,000 2,550,000 (2,550,000) 63,750 (63,750) 1,594 (1,594) 40 (40) 1 (1) $ 0 Operating Departments Govt. Corp. Costs s 1 t Allocat ion of AS (0.25, 0.40, 0.35) s 1 t Allocat ion of IS (0.10, 0.30, 0.60) n 2 d Allocat ion of AS (0.25, 0.40, 0.35) n 2 d Allocat ion of IS (0.10, 0.30, 0.60) 3rd Allocat ion of AS (0.25, 0.40, 0.35) rd 3 Allocation of IS (0.10, 0.30, 0.60) th 4 Allo cation o f AS (0.25, 0.40, 0.35) th 4 Allo cation o f IS (0.10, 0.30, 0.60) th 5 Allo cation o f AS (0.25, 0.40, 0.35) th 5 Allo cation o f IS (0.10, 0.30, 0.60) Total allocat ion $ 240,000 $ 210,000 255,000 (255,000) 6,375 (6,375) 160 (160) 4 (4) 0 $ 0 765,000 102,000 19,125 2,550 478 64 12 2 0 $1,129,231 1,530,000 89,250 38,250 2,231 956 56 24 1 1 $1,870,769 2. a. b. c. d. e. Direct Step­Down (AS first) Step­Down (IS first) Reciprocal (linear equations) Reciprocal (repeated iterations) Govt. Consulting $1,120,000 1,090,000 1,168,000 1,129,231 1,129,231 Corp. Consulting $1,880,000 1,910,000 1,832,080 1,870,769 1,870,769 The four methods differ in the level o f support department cost allocat ion across support departments. The level o f reciprocal service by support departments is material. Administrative Services supplies 25% of its services to Informat ion Systems. Information Systems supplies 10% of its services to Administrative Services. The Informat ion Department has a budget of $2,400,000 that is 400% higher than Administrative Services. The reciprocal method recognizes all the interactions and is thus the most accurate. This is especially clear from looking at the repeated iterations calculat ions. 15­8 15­21 (40 min.) Direct and step­down allocation. 1. Support Departments HR Info. Systems $72,700 $234,400 (72,700) (234,400) $ 0 Operating Departments Corporate Consumer $ 998,270 $489,860 43,620 127,855 $1,169,745 29,080 106,545 $625,485 Total $1,795,230 Costs Incurred Alloc. of HR costs (42/70, 28/70) Alloc. of Info. Syst. costs (1,920/3,520, 1,600/3,520) $ 0 $1,795,230 2. Rank on percentage of services rendered to other support departments. Step 1: HR provides 23.077% of its services to informat ion systems: 21 21 = = 91 42 + 28 + 21 This 23.077% of $72,700 HR department costs is $16,777. Step 2: Informat ion systems provides 8.333% of its services to HR: 320 320 = = 8.333% 3 840 , 1 920 + 1 600 + 320 , , This 8.333% of $234,400 informat ion systems department costs is $19,533. Support Departments HR Info. Systems $72,700 $234,400 (72,700) $ 0 16,777 251,177 (251,177) $ 0 Operating Departments Corporate Consumer $ 998,270 $489,860 33,554 22,369 Total $1,795,230 23.077% Costs Incurred Alloc. of HR costs (21/91, 42/91, 28/91) Alloc. of Info. Syst. costs (1,920/3,520, 1,600/3,520) 137,006 $1,168,830 114,171 $626,400 $1,795,230 3. An alternat ive ranking is based on the dollar amount of services rendered to other support departments. Using numbers fro m requirement 2, this approach would use the fo llowing sequence: Step 1: Allocate Informat ion Systems first ($19,533 provided to HR). Step 2: Allocate HR second ($16,777 provided to Informat ion Systems). 15­9 15­22 (30 min.) Reciprocal cost allocation (continuation of 15­21). 1. The reciprocal allocat ion method explicit ly includes the mutual services provided amo ng all support departments. Interdepartmental relat ionships are fully incorporated into the support department cost allocat ions. 2. HR = $72,700 + .08333IS IS = $234,400 + .23077HR HR = $72,700 + [.08333($234,400 + .23077HR)] = $72,700 + [$19,532.55 + 0.01923HR] 0.98077HR = $92,232.55 HR = $92,232.55 ¸ 0.98077 = $94,041 IS = $234,400 + (0.23077 ´ $94,041) = $256,102 Support Depts. HR Info. Systems $72,700 $234,400 (94,041) 21,702 Operating Depts. Corporate Consumer Total $ 998,270 $489,860 $1,795,230 43,404 28,935 Costs Incurred Alloc. of HR costs (21/91, 42/91, 28/91) ...
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