wk11_ch15n - Ch 15: Allocation of Support Department Costs,...

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Ch 15: Allocation of Support Department Costs, Revenue Allocation
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Allocating Costs of a Support  Department to Operating Departments Support (Service) Department – provides the services that assist other internal departments in the company (e.g., IT, accounting) Operating (Production) Department – directly adds value to a product or service
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Methods to Allocate Support Department  Costs Single-rate method – allocates costs of each support department (cost pool) to production departments (cost objects) using the same rate per unit of a single allocation base No distinction between fixed and variable costs Dual-Rate method – partitions costs of each support department into two pools: a variable-cost pool and a fixed- cost pool. Each pool uses a different cost-allocation base (usually actual usage for VC, budgeted usage for FC - because VC varies with actual usage while FC is committed in advance based on budgeted [i.e., expected] usage)
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Allocation Method Tradeoffs Single-Rate method is simple to implement, but treats fixed costs as if they were variable => distortions in operating departments’ decisions Dual-Rate method treats fixed and variable costs more realistically (=> no distortion), but is more complex to implement
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Allocation Bases Under either method, allocation of support department costs can be based on one of three scenarios: 1. budgeted rate * budgeted usage (of cost-allocation base) 2. budgeted rate * actual usage 3. actual rate * actual usage (much less common than 1 and 2: actual rates not known until the end of the period) Single-rate allocation: typically use budgeted rate*actual usage
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wk11_ch15n - Ch 15: Allocation of Support Department Costs,...

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