emba presentation november 17,2012. cost allocations involve: common costs joint costs
TRANSCRIPT
Purposes of Cost Allocation To provide information for economic
decision making To motivate managers To justify costs for reimbursement To measure income and use of assets
Criteria for Allocation of Costs
Cause and effect Benefits received Fairness or equity Ability to bear
Steps in Cost Allocation
Define the cost objects Accumulate common costs Choose a method for assigning costs
Physical Units Method
Select White Knotty Total
Board feet 450,000 750,000 300,000 1,500,000
Weighting 30% 50% 20% 100%
Allocation of joint costs 90,000$ 150,000$ 60,000$ 300,000$
Separate costs 60,000 90,000 15,000 165,000
Total costs 150,000$ 240,000$ 75,000$ 465,000$
Cost per board foot 0.33$ 0.32$ 0.25$ 0.31$
Sales Value at Spin Off Method
Select White Knotty Total
(450,000 x..35)(750,000 x.40)(300,000 x .19) 157,500$ 300,000$ 75,000$ 532,500$
Weighting 30% 56% 14% 100%
Allocation of joint costs 88,732$ 169,014$ 42,254$ 300,000$
Separate costs 60,000 90,000 15,000 165,000
Total costs 148,732$ 259,014$ 57,254$ 465,000$
Cost per board foot 0.33$ 0.35$ 0.19$ 0.31$
Net Realizable Value Method
Select White Knotty Total
(405,000 x.40)(675,000 x.55)(270,000 x .25) 162,000$ 371,250$ 67,500$ 600,750$
Less separate costs 60,000 90,000 15,000 165,000
NRV at split off 102,000$ 281,250$ 52,500$ 435,750$
Weighting 23% 65% 12% 100%
Allocated joint costs 70,224$ 193,632$ 36,145$ 300,000$
Add separate costs 60,000 90,000 15,000 165,000
Total costs 130,224$ 283,632$ 51,145$ 465,000$
Cost per board foot 0.29$ 0.38$ 0.17$ 0.31$
Method Select White
Knotty Total
Physical units .33 .32 .25 .31
Split off .33 .35 .19 .31
NRV .29 .38 .17 .31
Comparison of the Three Methods
Pros and Cons
Physical units – is easy to calculate Split-off – may not be appropriate if
there is no market at the split-off point
NRV – assumes that the greater the end sales dollars, the better it can bear the joint cost
Direct Method Allocations
Head Percent Hours PercentAdmin/HR - - - - Information Services - - - - Government 40 0.53333 3,000 0.33333 Corporate 35 0.46667 6,000 0.66667
Total 75 1.00000 9,000 1.00000
Administrative Information Services
Direct Method
A/HR IS GOVT CORP
Costs $ 600,000 $ 2,400,000 $ 0 $ 0
All A/HR:(.53333, .46667 ) (600,000) 0 320,000 280,000
All IS:(.33333, .66667) 0(2,400,000) 800,000
1,600,000
Totals $ 0 $ 0 $1,120,000$1,880,000
Step Down Allocations
Head Percent Hours PercentAdmin/HR - - - - Information Services 25 0.25000 - - Government 40 0.40000 3,000 0.33333 Corporate 35 0.35000 6,000 0.66667
Total 100 1.00000 9,000 1.00000
Administrative Information Services
Step Down Method – A/HR First
A/HR IS GOVT CORP
Cost $ 600,000 $ 2,400,000 $ 0 $ 0
A/HR
(.25, .40, .35) (600,000) 150,000 240,000210,000
IS
(.33333. .66667) 0(2,550,000) 850,000 1,700,000
Totals $ 0 $ 0 $1,090,000$1,910,000
Reciprocal Allocations
Head Percent Hours PercentAdmin/HR - - 1,000 0.10000 Information Services 25 0.25000 - - Government 40 0.40000 3,000 0.30000 Corporate 35 0.35000 6,000 0.60000
Total 100 1.00000 10,000 1.00000
Administrative Information Services
Reciprocal Method A/HR IS GOVT CORP
Costs $ 600,000 $2,400,000
A/HR (.25, .40, .35) (861,538) 215,385 344,615
301,538
IS (.10, .30, .60) 261,538 (2,615,385) 784,615
1,569,231
Totals $ 0 $ 0 $1,129,230 $1,870,769
A = 600,000 + .10 ISIS = 2,400,000 + .25 AIS = 2,400,000 +1 50,000 + .025 IS.9750 IS = 2,550,000IS = 2,615,385A = 600,000+.10 (2,615,385)A = 861,538
Comparison of Results
Method Government Corporate
Direct $1,120,000 $1,880,000
Stepdown Adm first $1,098,000
$1,910,000
Stepdown IT first $1,128,000
$1,892,000
Reciprocal $1,129,230 $1,870,769
Pros and Cons of Methods
Direct method – easy but ignores how support departments use each other
Step down – widely accepted but requires designation of a “first” department
Reciprocal – most accurate but not well understood or widely used