Each pool uses a different cost allocation base 14 Allocation Method Tradeoffs

Each pool uses a different cost allocation base 14

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Each pool uses a different cost-allocation base
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14Allocation Method TradeoffsSingle-rate method is simple to implement, but treats fixed costs in a manner similar to variable costsDual-rate method treats fixed and variable costs more realistically, but is more complex to implement
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15Allocation BasesUnder either method, allocation of support costs can be based on one of the three following scenarios:1.Budgeted overhead rate and budgeted hours2.Budgeted overhead rate and actual hours3.Actual overhead rate and actual hoursChoosing 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
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16Methods of Allocating Support Costs to Production Departments1.Direct2.Step-Down3.Reciprocal
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Allocating SupportDepartments CostsDirect method:Allocates support department costs to operatingdepartments only.Step-down (sequential allocation) method:Allocates support department costs to other supportdepartments and to operating departments.Reciprocal allocation method:Allocates costs by services provided among allsupport departments.
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18Direct MethodAllocates support costs only to Operating DepartmentsNo interaction between Support Departments prior to allocation
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19Direct Method
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20Service Allocation: Direct Method Procedure: Ignore each service department’s use of other service departments. Allocate service department costs only to operating departments.Advantages: Simple to administer and explain.Disadvantages:Allocations are not accurate estimates of opportunity costs when service departments use other service departments.Incentives exist for service departments to make excessive use of other service departments.
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21Step-Down MethodAllocates support costs to other support departments and to operating departments that partially recognizes the mutual services provided among all support departmentsOne-way interaction between Support Departments prior to allocation
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22Step-Down Method
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23Service Allocation: Step-down Method Procedure:Start with one service department and allocate all of its costs to the remaining service and operating departments.Continue one-by-one through each service department allocating all direct costs of that department and costs allocated to it.A good way of choosing the order of allocation is by (1) most reliable “cause and effect” cost driver, (2) number of other departments serviced, and (3) finally, as the default, total budget of department. Advantages:Considers some of the interdependence of service departmentsDisadvantages:Resulting allocations are inaccurate estimates of opportunity costs. Allocation less than opportunity cost for first departmentAllocation more than opportunity cost for last department
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24Reciprocal MethodAllocates support department costs to operating departments by fully recognizing the mutual services provided among all support departmentsFull two-way interaction between Support Departments prior to allocation
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25Reciprocal Method
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26Service Allocation: Reciprocal MethodProcedure:Write equations defining variable cost relationships among divisions.
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  • Fall '18
  • jane
  • Accounting, production departments, departments

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