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HDF15_Allocation+Support - Allocation of Support Department...

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Unformatted text preview: Allocation of Support Department Costs, Common Costs, and Revenues Allocating Costs of a Supporting Department to Operating Depts Operating (Production) Department directly adds value to a product or service Supporting (Service) Department provides the services that assist other internal departments in the company Two questions when allocating the costs of a support department 1. Should fixed costs of support departments be allocated to operating divisions? 2. Should variable and fixed costs be allocated in the same way? Methods to Allocate Support Department Costs Single-rate method allocates costs in each cost pool (service department) to cost objects (production departments) using the same rate per unit of a single allocation base No distinction is made between fixed and variable costs in this method Methods to Allocate Support Department Costs Dual-Rate method segregates costs within each cost pool into two segments: a variable-cost pool and a fixed-cost pool. Each pool uses a different cost-allocation base Allocation Method Tradeoffs Single-Rate method is simple to implement, but treats fixed costs in a manner similar to variable costs Dual-Rate method treats fixed and variable costs more realistically, but is more complex to implement Allocation Bases Under either method, allocation of support costs can be based on one of the three following scenarios: 1. Budgeted overhead rate and budgeted hours 2. Budgeted overhead rate and actual hours 3. Actual overhead rate and actual hours Choosing between actual and budgeted rates: budgeted is known at the beginning of the period, while actual will not be known with certainty until the end of the period Exercise 15-16 The Chicago power plant that services all manufacturing departments of MidWest Engineering has a budget for the coming year. This budget has been expressed in the following monthly terms: Department Needed at Practical Capacity Production Level (Kilowatt-Hrs) Average Expected Monthly Usage (Kilowatt-Hrs) Rockford 10,000 8,000 Peoria 20,000 9,000 Hammond 12,000 7,000 Kankakee 8,000 6,000 Total 50,000 30,000 The expected monthly costs for operating the power plant during the budget year are $15,000: $6,000 variable and $9,000 fixed. Exercise15-16 cont. Assume a single cost pool is used for power plant costs. What budgeted amounts will be allocated to each manufacturing department if (a) the rate is calculated based on practical capacity and costs are allocated based on practical capacity? Total costs in pool = $6,000 + $9,000 = $15,000 Practical capacity = 50,000 kilowatt hours Allocation rate = $15,000 / 50,000 = $0.30 per hour of capacity Rockford Peoria Hammond Kankakee Total 10,000 20,000 12,000 8,000 50,000 $3,000 $6,000 $3,600 $2,400 $15,000 Exercise 15-16 cont....
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