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CHAPTER
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Objectives
1. Describe theAfter studying this support difference between departmentschapter, you should and producing departments. 2. Calculate single be able to: changing rates and multiple for a support department. 3. Allocate support-department costs to producing departments using the direct, sequential, and reciprocal methods. 4. Calculate departmental overhead rates.
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Types of Departments
Producing departments are directly responsible for creating the products or services sold to customers.
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Types of Departments
Supporting departments provide essential support services for producing departments.
Maintenance, grounds, engineering, personnel, storage
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Steps in Allocating Support Department Costs to Producing Departments 1. Departmentalize the firm. 2. Classify each department as a support department or a producing department. 3. Trace all overhead costs in the firm to a support department or producing department. 4. Allocate supports department costs to the producing departments.
Continued
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Objectives of Allocation
1. To obtain a mutually agreeable price.
4. To value inventory.
5. To motivate managers.
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AND
The firm developed in-house Photocopying Department to serve Audit, Tax & MAS Depts. The cost of Photocopying Dept: Fixed costs (salary & rental)........$26,190 per year Variable costs (paper & toner)..$0.023 per page
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Number of Pages x Fixed Cost Total $0.023 + Allocation = Charges Audit department Tax department MAS department Total $2,116 1,495 2,645 $6,256 $ 5,238 14,928 6,024 $26,190 $ 7,354 16,423 8,669 $32,446
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Budgeted costs.
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Grinding
Assembly
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Grinding
Assembly
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0.75
0.25
Direct Method
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Maintenance b
$
a b
--0
-160,000
$ 0
80,000
80,000
$367,500 $202,500
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1
Power
2
Maintenance
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STEP 2
Maintenance
Grinding
Assembly
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STEP 2
Grinding
Assembly
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0.60
Sequential Method
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0.50
0.50
Sequential Method
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$355,000 $215,000
0.20 x $250,000 = $50,000; 0.60 x $250,000 = $150,000; 0.20 x $250,000 = $50,000 0.50 x $210,000 = $105,000 Sequential Method
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The reciprocal method of allocation recognizes all interactions among support departments.
Reciprocal Method
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$100,000
600,000 4,500
$60,000
200,000 4,500
Proportion of Output Used by Departments Power Maintenance Grading Assembly Allocated ratios: Power (P) --0.20 0.60 0.20
Maintenance (M)
0.10
---
0.45
0.45
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ALLOCATE SUPPORT DEPARTMENT COSTS USING THE ALLOCATION RATIOS AND THE SUPPORT-DEPARTMENT COSTS FROM RECIPROCAL METHODS EQUATIONS
Support Departments Producing Departments Power Maintenance Grading Assembly Direct costs Power Maintenance Total $ $250,000 -271,429 271,429 0 $160,000 54,286 -214,286 $ 0 $100,000 $ 60,000 162,857 96,429 54,286 96,429
$359,286 $210,715
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Comparison of Support Department Cost Allocations Using the Direct, Sequential, and Reciprocal Methods
Direct Method Grinding Assembly $100,000 $ 60,000 187,500 80,000 62,500 80,000
Direct costs
Allocated from power Allocated from maintenance
Total cost
$367,500
$202,500
Return to show
Click on button to compare with sequential method Click on button to compare with reciprocal method
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Comparison of Support Department Cost Allocations Using the Direct, Sequential, and Reciprocal Methods
Sequential Method Grinding Assembly $100,000 $ 60,000 150,000 105,000 50,000 105,000
Direct costs
Allocated from power Allocated from maintenance
Total cost
$355,000
$215,000
Return to show
Click on button to compare with direct method Click on button to compare with reciprocal method
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Comparison of Support Department Cost Allocations Using the Direct, Sequential, and Reciprocal Methods
Reciprocal Method Grinding Assembly $100,000 $ 60,000 162,857 96,429 54,286 96,429
Direct costs
Allocated from power Allocated from maintenance
Total cost
$359,286
$210,715
Return to show
Click on button to compare with direct method Click on button to compare with sequential method
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Grinding Department ($12,500 less to the Assembly Department) than Sequential Method.
Meaning: Manager Assembly Dept prefer Direct
the different methods and have good reasons for the eventual choice (consider cost-benefits)
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as follows (assuming the normal level of activity is 71,000 MH): OH rate = $355,000 71,000 = $5 per MH
The overhead rate for the assembly department is
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$10 2 $12
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Chapter Seven
The End
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