ACCT 4210 (Fall 2013) - Week 12 (Ch 15)

ACCT 4210 (Fall 2013) - Week 12 (Ch 15) - Week 12 Chapter...

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Allocating Support Department Costs Week 12– Chapter 15
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Type of Departments Operating (Production) Department Adds value to a product or service Support (Service) Department Provides the services that assist other departments in the company 2 Maintenanc e Informatio n Systems Warehousin g Assembl y Machinin g
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Allocating Service Costs Support Department Costs Costs of the resources applied by an organization to provide support services Examples: costs of personnel, equipment, facilities Cost Allocation A systematic method of assigning the costs of resources to a department, product, or service when directly tracing costs is not possible (that is, charging support costs to internal customers) 3
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Why Cost Allocation Is Needed Pros To reduce inefficiencies; if support services are free, resources can be abused Cost allocation creates the atmosphere of a simulated market for internal support- services Cons Cost allocations are arbitrary and might not measure the uses of resources accurately The rates charged to internal users might be subject to dispute Internal users might stop using support- services 4
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Allocation Bases Cost Allocation Base Basically the cost driver of a support- service cost 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 Budgeted is known at the beginning of the period, whereas actual will not be known with certainty until the end of the period. 5
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Choose the Appropriate Cost- Allocation Base(s) and Rate(s) 6 Criteria of a Cost Allocation Base: 1. Causal relation Does the cost allocation base really drive the cost? (Example: Is # of new hires a good cost driver of cost of HR dept?) 2. Reasonableness Does the cost allocation base really reflect the usage of the service? (Example: Does charging departments by # new hires really reflect the usage of services of HR by other departments? ) 3. Benefits > Costs More complex cost allocation systems trace
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Methods of Allocating Support Costs to Operating Departments 7 Ways to Allocation Support Service Costs: 1. Direct Method Costs of support departments are only allocated to production departments 2. Step-Down Method (Sequential Allocation Method) Allocate costs of support departments in steps; allocate costs of more general support departments first, then to less general ones 3.
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