$360 ÷ ($360 + $540) = .40.40 ×$760 = $304How much to the international client?$760 – $304 = $456
Incremental Cost ExampleAssume that the business meeting in Chicagois viewed as the primary party.What would be the cost allocation?International client (primary)$540Durham client (incremental) $760 – $540 =$220
44Methods of Allocating Common CostsIncremental Cost-Allocation Method ranks the individual users of a cost object in the order of users most responsible for a common cost and then uses this ranking to allocate the cost among the usersThe first ranked user is the Primary User and is allocated costs up to the costs of the primary user as a stand-alone user (typically gets the highest allocation of the common costs)The second ranked user is the First Incremental User and is allocated the additional cost that arises from two users rather than oneSubsequent users handled in the same manner as the second ranked user
45Example common costAssuming Dubna plant is the first userDubna gets 800 TL; St.Peterburg gets 1900 – 800 = 1100 TLAssuming St.Peterburg is the firstSt.Peterburg gets 1300 TL; Dubna gets 1900 – 1300 = 600 TLProbably have to agree with the management.
46Joint cost allocationJoint cost is incurred to produce two or more outputs from the same input.Joint costs occur only in disassembly processes, such as refining and food processing.Common costs occur in either disassembly or assembly processes, such as building cars
47Joint Costs: Net Realizable ValueNet realizable value (NRV) is the difference between selling price and costs that would be incurred after the split-off point.Compute NRV of each product after the split-off point. Decide to produce products with positive NRV, but not with negative NRV.For control and divisional reporting, allocate joint costs to products in the ratio of the NRV of each product.
48Joint costs- exampleRaw MILKProcess furtherYogurtWhite CheeseSplit off point Sell as MILKPasteurizeMILK
Support ProducingDepartments Departments A B 1 2 3Direct Costs $200,000 $125,000 $80,000 $50,000 $130,000 Square Feet 4,000 6,000 40,000 44,000 10,000Purchase Orders 600 400 1,300 3,000 4,000Machine Hours 20,000 5,000 15,000 Labour Hours 3,000 2,000 5,000 Support Department Allocation: Another Example
Support ProducingDepartments Departments A B 1 2 3Support Department Allocation: (Direct Method)*Allocated on basis of machine hours at $5.00 per machine hour**Allocated on basis of labour hours at $12.50 per labour hourDirect Costs $200,000 $125,000 $80,000 $50,000 $130,000 *Department A ($200,000) 100,000 25,000 75,000**Department B ($125,000) $37,500 $25,000 $62,500 Total $217,500 $100,000 $267,500 Worksheet
Support ProducingDepartments Departments A B 1 2 3Support Department Allocation: (Sequential Method)Direct Costs $200,000 125,000 $80,000 $50,000 $130,000 ADepartment A ($200,000) 12,000 80,000 88,000 20,000 BDepartment B ($137,000) 24,401 56,310 56,289Total $184,401 $194,310 $206,289 ACost allocated to other departments on basis of square feet at $2.00 persquare foot. Please note the sequence of allocation (Dept.. A is allocated first).BCost allocated to other departments on basis of purchase orders at$18.77 per purchase order.
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