7-1 hansen & mowen cost management accounting and control

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HANSEN & MOWENHANSEN & MOWEN

Cost ManagementCost ManagementACCOUNTING AND CONTROLACCOUNTING AND CONTROL

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Allocating Costs of Support Allocating Costs of Support Departments and Joint ProductsDepartments and Joint Products

7

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An Overview of Cost AllocationAn Overview of Cost Allocation 1

Allocation is dividing a pool of costs and assigning those costs to subunits.

The cost objects must be determined, which are usually departments.

1. Producing

2. Support

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An Overview of Cost AllocationAn Overview of Cost Allocation 1

Examples of Departmentalization for a Manufacturing Firm

Examples of Departmentalization for a Manufacturing Firm

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An Overview of Cost AllocationAn Overview of Cost Allocation 1

Examples of Departmentalization for a Service FirmExamples of Departmentalization for a Service Firm

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An Overview of Cost AllocationAn Overview of Cost Allocation 1

Steps in Allocating Support Department Costs to Producing Departments

Steps in Allocating Support Department Costs to Producing Departments

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Allocating support department costs should be on the basis of appropriate causal factors (activity drivers).

An Overview of Cost AllocationAn Overview of Cost Allocation 1Examples of Possible Activity Drivers for Support

Departments

Examples of Possible Activity Drivers for Support Departments

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An Overview of Cost AllocationAn Overview of Cost Allocation 1

Objectives of AllocationObjectives of Allocation

1. To obtain a mutually agreeable price

2. To compute product-line profitability

3. To predict the economic effects of planning and control

4. To value inventory

5. To motivate managers

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2Allocating One Department’s Cost Allocating One Department’s Cost to Another Departmentto Another Department

The costs of a support department are often allocated through the use of a charging rate.

Major factors:

1. Choice of single or dual rate

2. Use of budgeted or actual support department costs.

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2Allocating One Department’s Cost Allocating One Department’s Cost to Another Departmentto Another Department

Single rate: Fixed costs + estimated variable costs estimated usage

Dual rate: Fixed rate and a variable rate

Development of fixed rate:

1. Determine budgeted fixed costs.

2. Compute allocation ratio

3. Allocate

Development of variable rate:

Costs that change as the activity driver changes

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2Allocating One Department’s Cost Allocating One Department’s Cost to Another Departmentto Another Department

When allocating support department costs, should actual or budgeted costs be allocated?

Answer: Budgeted – to prevent the transfer of efficiencies or inefficiencies from one department to another.

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2Allocating One Department’s Cost Allocating One Department’s Cost to Another Departmentto Another Department

Use of Budgeted Data for Products Costings:Comparison of Single- and Dual-Rate Methods

Use of Budgeted Data for Products Costings:Comparison of Single- and Dual-Rate Methods

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2Allocating One Department’s Cost Allocating One Department’s Cost to Another Departmentto Another Department

Use of Actual Data for Performance Evaluation Pur-poses: Comparison of Single- and Dual-Rate

Methods

Use of Actual Data for Performance Evaluation Pur-poses: Comparison of Single- and Dual-Rate

Methods

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3Choosing A Support DepartmentChoosing A Support DepartmentCost Allocation MethodCost Allocation Method

Data for Illustrating Allocation MethodsData for Illustrating Allocation Methods

*For a producing department, direct costs refer only to overhead costs that are directly traceable to the department.

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3Choosing A Support DepartmentChoosing A Support DepartmentCost Allocation MethodCost Allocation Method

Direct Allocation IlustratedDirect Allocation Ilustrated

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3Choosing A Support DepartmentChoosing A Support DepartmentCost Allocation MethodCost Allocation Method

Sequential Allocation IlustratedSequential Allocation Ilustrated

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3Choosing A Support DepartmentChoosing A Support DepartmentCost Allocation MethodCost Allocation Method

Data for Illustrating Reciprocal MethodData for Illustrating Reciprocal Method

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3Choosing A Support DepartmentChoosing A Support DepartmentCost Allocation MethodCost Allocation Method

Reciprocal Method IllustratedReciprocal Method Illustrated

a Power: 0.60 $271,429; Maintenance: 0.45 $214,286.

b Power: 0.20 $271,429; Maintenance: 0.45 $214,286.

*Rounded down.

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3Choosing A Support DepartmentChoosing A Support DepartmentCost Allocation MethodCost Allocation Method

Comparison of Support Department Cost Allocations Using the Direct, Sequential, and Reciprocal Methods

Comparison of Support Department Cost Allocations Using the Direct, Sequential, and Reciprocal Methods

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4Departmental Overhead RatesDepartmental Overhead Ratesand Product Costingand Product Costing

After allocating all support service costs to producing departments, an overhead rate is

calculated for each department.

Allocated service costs + Producing dept. overhead costs

Measure of activity (direct labor hours, machine hours)

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4Departmental Overhead RatesDepartmental Overhead Ratesand Product Costingand Product Costing

A product cost can now be determined.

Materials

+ Labor

+ Overhead

Product Cost

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Accounting for Joint Production ProcessesAccounting for Joint Production Processes 5

Joint products are two or more products produced simultaneously by the same process up to a “split-off” point.

The split-off point is the point at which the joint products become separate and identifiable.

Separable costs are easily traced to individual products and offer no particular problem.

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Material:Hog

Material:Hog

Accounting for Joint Production ProcessesAccounting for Joint Production Processes 5

Joint Production ProcessJoint Production ProcessJoint Production ProcessJoint Production Process

ProcessingProcessing

HideHide

Pork MeatPork Meat

Split-Off

Point

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Material:Steel

Material:Steel

Independent Multiple-Product Production Using Independent Multiple-Product Production Using the Same Materialthe Same MaterialIndependent Multiple-Product Production Using Independent Multiple-Product Production Using the Same Materialthe Same Material

Accounting for Joint Production ProcessesAccounting for Joint Production Processes 5

ProcessingProcessing

ProcessingProcessing

TaurusTaurus

MustangMustang

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The distinction between joint and by-products rests solely on the relative importance of their sales value.

A by-product is a secondary product recovered in the course of manufacturing a primary product.

5Accounting for Joint Production ProcessesAccounting for Joint Production Processes

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The distinction between joint and by-products rests solely on the relative importance of their sales value.

A by-product is a secondary product recovered in the course of manufacturing a primary product.

5Accounting for Joint Production ProcessesAccounting for Joint Production Processes

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Benefits-Received Approaches Physical Units Method Weighted Average Method

Allocation Based on Relative Market Value Sales-Value-at-Split-Off-Method Net Realizable Value Method

Accounting for Joint Production ProcessesAccounting for Joint Production Processes 5

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A sawmill processes logs into four grades of lumber totaling 3,000,000 board feet as follows:

Percent of Joint Cost Grades Board Feet Units Allocation

First and second 450,000 0.15 $ 27,900

No. 1 common 1,200,000 0.40 74,400

No. 2 common 600,000 0.20 37,200

No. 3 common 750,000 0.25 46,500

Totals 3,000,000 $186,000

Accounting for Joint Production ProcessesAccounting for Joint Production Processes 5

Physical Units MethodPhysical Units MethodPhysical Units MethodPhysical Units Method

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A peach canning factory purchases $5,000 of peaches and grades and cans them by quality. The following data pertains to this operation:

Number Weight Weighted Number AllocatedGrades of Cases Factor of Cases Percent Joint Cost

Fancy 100 1.30 130 0.21667$1,083

Choice 120 1.10 132 0.220001,100

Standard 303 1.00 303 0.505002,525

Pie 70 0.50 35 0.05833 292

Totals 600$5,000

Accounting for Joint Production ProcessesAccounting for Joint Production Processes 5

Weighted Average MethodWeighted Average MethodWeighted Average MethodWeighted Average Method

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Using the lumber mill example from earlier--

Price at Percent Quantity Split-Off Sales of Total Allocated Produced (per 1,000 Value at Market Joint Grades (board ft.) board ft.) Split-Off Value Cost

First and second 450,000 $300 $135,000 0.2699$ 50,201

No. 1 common 1,200,000 200 240,000 0.479989,261

No. 2 common 600,000 121 72,600 0.145227,007

No. 3 common 750,000 70 52,500 0.1050 19,530

Totals 3,000,000 $500,100$185,999

*

*Rounding error

Accounting for Joint Production ProcessesAccounting for Joint Production Processes 5

Sales-Value-at-Split-Off MethodSales-Value-at-Split-Off MethodSales-Value-at-Split-Off MethodSales-Value-at-Split-Off Method

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A company manufactures two products, Alpha and Beta, from a joint process. One production run costs $5,750 and results in 1,000 gallons of Alpha and 3,000 gallons of Beta. Neither product is salable at the split-off point, but must be further processed. The separable cost for Alpha is $1 per gallon and for Beta is $2 per gallon.

Further Hypothetical Hypothetical Allocated Market Processing Market Number Market Joint Price Cost Price of Units Value Cost

Alpha $5 $1 $4 1,000 $ 4,000 $2,300Beta 4 2 2 3,000 6,000 3,450

$10,000 $5,750

Accounting for Joint Production ProcessesAccounting for Joint Production Processes 5

Net Realizable Value MethodNet Realizable Value MethodNet Realizable Value MethodNet Realizable Value Method

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Percent

Revenue ($5 x 1,000) + ($4 x 3,000) $17,000 100 %Costs [$5,750 + ($1 x 1,000) + ($2 x 3,000)] 12,750 75 % Gross margin $ 4,250 25 %

Alpha Beta

Eventual market value $ 5,000 $12,000Less: Gross margin at 25% of market value 1,250 3,000Cost of goods sold $ 3,750 $ 9,000Less: Separable costs 1,000 6,000 Allocated joint costs $2,750 $ 3,000

Accounting for Joint Production ProcessesAccounting for Joint Production Processes 5

Constant Gross Margin Percentage MethodConstant Gross Margin Percentage MethodConstant Gross Margin Percentage MethodConstant Gross Margin Percentage Method

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End of End of Chapter 7Chapter 7