Solve system of simultaneous equations with linear algebra.Allocate fixed costs based on each operating division’s planned use of the service department’s capacity.Advantages:Most accurate method (best approximates opportunity costs)Disadvantages:Slightly harder to set up and compute solutionDifficult to explain results to unsophisticated managersPrevents managers from “managing” cost allocations for financial reporting and/or taxes.
27Choosing Between MethodsReciprocal is the most preciseDirect and Step-Down are simple to compute and understandDirect Method is widely used
30Step-down methodTwo service depts; We can start with either one but would yield different resultsUsually start with the service dept that provides a higher percentage of service to other service departments first Rank the service departments in the order that they provide service to other service departments
31step-down with plant maintenance first
32step-down with information system first
33Comparison of Methods
34Allocating Common CostsCommon Cost – the cost of operating a facility, activity, or like cost object that is sharedby two or more users at a lower cost than the individual cost of the activity to each user
35Methods of Allocating Common CostsStand-Alone Cost-Allocation Method – uses information pertaining to each user of a cost object as a separate entity to determine the cost-allocation weightsIndividual costs are added together and allocation percentages are calculated from the whole, and applied to the common cost
36Example – Common costsThe manager of your plants in Russia wanted to consult you and wanted you to visit their sites.Below are the possible fares for these trips individually or combined. You will charge the cost of your plane ticket to these two sites.Dubna and St.PetersburgAnkara-Dubna-Ankara costs TL 800Ankara-St.Peterburg-Ankara costs TL 1300Ankara-Dubna-St.Peterburg-Ankara costs TL 1900How would you allocate the cost between these two sites?
37Example common costs – stand aloneDetermine weights:Dubna = St.Peterburg =Then costs are Dubna 38.1% *1900= 723.90St.Peterburg 69.1% *1900 =1176.10%1.381300800800%9.6113008001300
Allocate common costsusing either the stand-aloneor incremental method.
Allocating Common CostsTwo methods for allocating common cost are:1. Stand-alone costallocation method2. Incremental costallocation method
Stand-Alone ExampleA consultant in Tampa is planning to go toChicago and meet with an international client.The round-trip Tampa/Chicago/Tampaairfare costs $540.The consultant is also planning to attenda business meeting with a North Carolinaclient in Durham.
Stand-Alone ExampleThe round-trip Tampa/Durham/Tampaairfare costs $360.The consultant decides to combine the twotrips into a Tampa/Durham/Chicago/Tampaitinerary that will cost $760.
Stand-Alone ExampleHow much should the consultant chargeto the North Carolina client?
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- Fall '18
- Accounting, production departments, departments