Ch 15: Allocation of Support Department Costs, Common Costs and Revenues

budgeted/actual, budgeted/budgeted

(common approach) When allocating costs using dual rate method, allocate variable costs using _____ rate and ____ usage, and fixed costs using ____ rate and ____ usage

service department

A support department is also called a _____

Cost Accounting Standards Board (CASB)

All contracts with U.S. government agencies must comply with cost accounting standards issued by the ______

1. Budgeted OH rate & budgeted quantity of cost allocation base 2. Budgeted OH rate & actual quantity of cost allocation base 3. Actual OH rate and actual quantity of cost allocation base

Allocation of support costs can be based on one of the 3 scenarios (3)

reciprocal

Differences among the three methods' allocations increase as the magnitude of the _____ allocations increases and as the differences across operating departments' usage of each support department's services increase.

shapley (fairest)

If there is no clear indication of which product is the more "important" product, or if it can be reasonably assumed that the two products are equally important to the company's strategy, what method of revenue allocation for bundled products should be used?

1. Single Rate 2. Dual Rate

If we decide to allocate fixed costs (which is the approach followed by most companies) then what 2 methods are possible

first

In the incremental cost-allocation method, the ____ ranked user is the primary user and is allocated costs up to the costs as a stand-alone user (typically gets the highest allocation of the common costs).

second

In the incremental cost-allocation method, the____ ranked user is the first incremental user and is allocated the additional cost that arises from two users rather than one.

stand alone, incremental revenue

Two Methods to Allocate Revenue to Bundled Products (2)

benefits received

Weighting approaches that use revenue information better capture "________" by customers than unit costs or physical units.

no

does the direct method allocate support-department costs to other support departments

step-down method

method that allocates support-department costs to other support departments and to operating departments in a sequential manner that partially recognizes the mutual services provided among all support departments.

reciprocal method

method that fully incorporates interdepartmental relationships into the support-department cost allocation.

reciprocal (because it considers the mutual services provided among all support departments)

method that is conceptually the most precise

direct

Method of Allocating Support Costs to Production Departments that allocates support department costs directly to operating departments.

step down

Method of Allocating Support Costs to Production Departments that allocates support department costs to other support departments

reciprocal

Method of Allocating Support Costs to Production Departments that fully allocates support-department costs to other support departments

single rate

Method of allocating fixed costs that involves combining fixed and variable costs into one pool

dual rate

Method of allocating fixed costs that involves keeping fixed and variable costs in separate pools

reciprocal

Method that allocates support-department costs to operating departments by fully recognizing the mutual services provided among all support departments.

Incremental revenue-allocation method

Method to Allocate Revenue to Bundled Products that ranks individual products in a bundle according to criteria determined by management and then uses this ranking to allocate bundled revenues to individual products (similar to earlier discussed incremental cost-allocation method).

stand alone

Method to Allocate Revenue to Bundled Products that uses product-specific information on the products in the bundle as weights for allocating the bundled revenues to the individual products.

1. Direct 2. Step-down 3. Reciprocal

Methods of Allocating Support Costs to Production Departments (3)

sequential allocation method

Step down method is also called....

1. Express Support Department Costs and Reciprocal Relationships in the form of linear equations. 2. Solve the set of linear equations to obtain the complete reciprocated costs of each support department. 3. Allocate the complete reciprocated costs of each support department to all other departments on the basis of the usage percentages.

What are the 3 steps required for the reciprocal method when implemented by formulating and solving linear equations

1. guides dep't managers to make decisions that benefit both the organization and each dept 2. allocating fixed costs based on budgeted usage helps user dep'ts with both ST and LT planning because user depts know the costs allocated to them in advance

What are the advantages of using the dual rate method? (2)

1. less costly to implement 2. offers user (operating) departments operational control over the charges they bear

What are the advantages of using the single rate method? (2)

1.Requires managers to distinguish variable costs from fixed costs, which is often a challenging task. 2. Does not indicate to operating managers the cost of fixed support department resources used because fixed costs are allocated to operating departments based on budgeted rather than actual usage. 3. Allocating fixed costs on the basis of budgeted long-run usage may tempt some managers to under-estimate their planned usage.

What are the disadvantages of using the dual rate method? (3)

may lead operating dept managers to make sub-optimal decisions that are in their own best interest but may be inefficient for the organization as a whole

What is a disadvantage of using the single rate method?

dual rate

What is the Commonly Used Approach for allocating costs? (dual or single)

selling prices (because the weights explicitly consider the prices customers are willing to pay for the individual products)

What is the preferred method of allocating revenues (selling prices, unit costs or physical units)?

1. Selling prices 2. Unit costs 3. Physical units.

What three types of weights may be used in the stand alone method for allocating revenues to bundled products?

common cost

a cost of operating a facility, activity, or like cost object that is shared by two or more users.

allowable cost

a cost that the contract parties agree to include in the costs to be reimbursed.

Bundled product

a package of two or more products or services that is sold for single price, but whose individual components may be sold as separate items at their own "stand-alone" prices

common

allocation issues can arise when revenues from multiple products are bundled together and sold at a single price. The methods for revenue allocation parallel those described for _____-cost allocations.

production department

an operating department is also called a ______

revenue object

anything for which a separate measurement of revenue is desired

Stand-alone cost-allocation method

common cost allocation method that determines the weights for cost allocation by considering each user of the cost object as a separate entity to determine the cost-allocation weights.

incremental cost-allocation method

common cost allocation method that 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 users.

Shapley method of cost allocation

common cost allocation method that where all possible combinations of ranking users is considered If there are two users A and B, first apply the incremental cost allocation method by considering A as the primary user and B as the secondary user. Then apply the method again by considering B as the primary user and A as the second user In the final step, average the results from the two allocations for the two users to come up with the allocation

common costs

costs that arise because each user obtains a lower cost by sharing than the separate cost that would result if each user operated independently.

operating department (production)

department that directly adds value to a product or service

service department

department that provides the services that assist other internal departments (operating departments and other support departments) in the company.

Stand-alone cost-allocation method

in this common cost allocation method, individual costs are added together and allocation percentages are calculated from the whole, and applied to the common cost.

support

information systems, production control, materials management, and plant maintenance are examples of ____ departments

budgeted (using actual costs passes on support department's efficient/inefficient consumption of resources to user departments - no accountability)

should actual or budgeted fixed costs be allocated?

increase

the difference in support costs calculated under the 3 method ______(increases/decreases) as the cost drive (labor hours, assembly hours, etc) increase

matrix method

the reciprocal method is also called....

direct

this method is widely used but as computing power to perform repeated iterations increases, more companies find the reciprocal method easier to implement.

1. Should fixed costs of a support departments be allocated to operating divisions? 2. If fixed costs are allocated, should variable and fixed costs of the support department be allocated in the same way?

what 2 questions do managers face when allocating the costs of a support department to operating departments or divisions

direct, step-down

what allocation methods are simple to compute and understand?

The goal is to allocate common costs to each user in a reasonable way.

what is the goal of allocating common costs?

actual, budgeted

when a company uses practical capacity to allocate costs, the single approach uses ____ rates for allocated fixed costs and dual approach uses ____ rates

using actual costs passes on support department's efficient/inefficient consumption of resources to user departments and therefore they have no accountability

why is it important to use budgeted rates for allocating costs?