Cost%20Acctg%20Chapter%207 - Cost Accounting Chapter 7...

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Unformatted text preview: Cost Accounting Chapter 7 Support Department Cost Allocation 7-2 1. Describe the difference between support departments and producing departments. 2. Calculate single and multiple changing rates for a support department. 3. Allocate support-department costs to producing departments using the direct, sequential, and reciprocal methods. 4. Calculate departmental overhead rates. Objectives Objectives 7-3 Types of Departments Supporting departments : provide essential support services for producing departments. Such as - maintenance, grounds, engineering, personnel, storage Producing departments : directly responsible for creating the products or services 7-4 General Issue or Objective 1. Allocation of same resource to two or more products or services or departments no change in total cost 2. Allocating or dividing a pool of costs and assigning them to subunits 3. Two types of overhead departmental and allocated support 4. Cannot have a support department OH rate as no product is produced 7-5 Why Important ? 1. Bid prices competitive issues 2. Profitability analyses 3. Manager behavior and incentive plans 4. Clear that the product or service requires the resource but it is unclear as to how to allocate 7-6 1. Departmentalize the firm. 2. Classify each department as a support department or a producing department. 3. Trace all overhead costs in the firm to a support department or producing department. 4. Allocate supports department costs to the producing departments using activity drivers . Steps in Allocating Support Department Steps in Allocating Support Department Costs to Producing Departments Costs to Producing Departments Continued Continued 7-7 5. Calculate predetermined overhead rates for the producing departments including service costs . 6. Allocate overhead costs to the units of individual products through the predetermined overhead rates multiple products . Steps in Allocating Support Department Steps in Allocating Support Department Costs to Producing Departments Costs to Producing Departments 7-8 Causal Factors or Cost/Activity Drivers for Causal Factors or Cost/Activity Drivers for Support Departments Support Departments Activity Drivers must be identified not only for allocation purposes but also in order for a manager to understand them and how he/she can control them (through more or less consumption). If costs not assigned a manager may over consume them Sometimes a proxy must be used such as square footage for plant depreciation (vs. assigned equipment) 7-9 Causal Factors or Cost/Activity Drivers for Causal Factors or Cost/Activity Drivers for Support Departments Support Departments Allows for measurement of service department Promotes efficiency Should outsourcing be considered Is it a core competency?...
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Cost%20Acctg%20Chapter%207 - Cost Accounting Chapter 7...

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