acct 202 chapter 19

DM— Step 5. Allocate support department costs by multiplying the support department costs by the percentage usage of each department.

to find total usage ($) of "janitorial services" for both Depts" then... Cutting Dept --> (Janitorial Dept allocated FOvH) x (% cutting dept usage) = total FOvH used by cutting dept Assembly Dept --> (Janitorial Dept allocated FOvH) x (% assembly dept usage) = total FOvH used by cutting dept ››

The sequential method's allocations can be viewed as a compromise on accuracy and difficulty, because...

it considers some, though not all, inter-support-department services, and is easier to compute than the reciprocal services method.

Why is applying a single-plantwide rate generate inaccurate product costs?

it is unlikely that a single cost driver will be appropriate for both the product and support departments - method fails to recognize that each product may need more help from one support dept versus another dept., so the SPW rate should be variable, not fixed

support department (service departments)

provides necessary indirect service to produce a product sometimes called service departments because they provide services to other departments accounted for as a "cost or responsibility center"--> ALL its direct costs accumulate in the center

multiple production department rates

A method of applying overhead to products in which overhead costs are first directly traced or distributed to support and production departments

make sure to add new allocated costs to Support dept 2 before allocating support dept 2's costs

IMPORTANT

The Sequential Method (or step-down) process

1st allocates costs from one support department to another support departments 2nd allocates costs to production departments 3rd — a 2nd support dept is selected to distribute its costs to the remaining support/ production depts *** the original support dept is not allocated costs** 4th — the process continues until all support dept are allocated to the production departments

Management determines the order in which the department costs are allocated based on the following:

1— Departments with higher costs are allocated earlier. 2— Departments serving a large number of support departments are allocated earlier. 3— Departments with more accurate cost drivers are allocated earlier. --manager often make subjective assessments about the order of allocation when these factors conflict

differences between Dm, Sm, RSm

3— Direct Method = - easiest, but least accurate 1— Reciprocal Services Method = - most difficult, but most accurate 2— Sequential Method = produces allocation results that are in between the Dm/ RSm in terms of difficulty and accuracy

The Sequential Method (or step-down)

A method of allocating support department costs to production departments that considers some inter-support-department services in a sequential or step-down fashion. Also known as the step-down method.

Dm, Sm, RSm (6 steps)

Step 1. Directly trace and distribute overhead costs to support and production departments. Step 2. Select a cost driver for each department. Step 3. Determine the usage of the support department cost driver by each department. Step 4. Determine the percentage (proportional) usage of support department cost drivers by each department. Step 5. Allocate support department costs by multiplying the support department costs by the percentage usage of each department. Step 6. Apply production department costs to products.

misc - joint costs/ allocation of support department costs

The allocation of support department costs and joint costs has important implications for performance evaluation. ex: compensation and promotions are determined in part by employees' ability to decrease costs.

support department cost allocation

The costs of services provided by a support department transferred to production departments.

split-off point

The point in a joint manufacturing process where the joint products become separable. Example: - costs of drilling, pumping, and delivering crude oil to a refinery are joint costs incurred in the joint production process of manufacturing the joint products of gasoline and kerosene -Pre "split-off point" —— costs are not traced separately to either gasoline or kerosene because the costs are needed for both products - once the crude oil is distilled, the outputs of gasoline and kerosene reach a split-off point and are now separable. Any new costs incurred to purify the two products can be traced to one product or the other.

T/F applying an appropriate cost driver to support departments is difficult and less accurate with a single-plantwide rate some facilities apply the support Dept. FOH to its products, while others considered these costs to be facility-level costs and do not apply them to products

True

major difference between the sequential method and the direct method

Under the sequential method, the total support department costs to be allocated will also include any costs that were allocated to that support department from other support departments.

Direct method — Step 4. Determine the percentage (proportional) usage of support department cost drivers by each department.

to fine % of "janitorial services" the "cutting Dept" used then... (CUtting department usage of cost driver)/ ("CUtting dept usage of cost driver" + "assembly dept usage of cost driver") to fine % of "janitorial services" the "assembly Dept" used then... (assembly department usage of cost driver)/ ("CUtting dept usage of cost driver" + "assembly dept usage of cost driver")

T/f Under the sequential method, support department costs are never allocated back to a support department whose costs have already been allocated. As a result, the sequential method captures some, but not all, of the inter-support-department services.

true

Based on DM, total cost are...

(step #1) + (step #5) + (step #5)= total (intial amt alloated) + (CUtting Dept total for caf) + (Assem Dept total for caf) = Cafe total costs (intial amt alloated) + (CUtting Dept total for janitor dept) + (Assem Dept total for janitor dept) = janitor department total costs

The four common methods for allocating joint costs are as follows:

- Physical units method - Weighted average method - Market value at split-off method - Net realizable value method none of these methods are more accurate than one another, but one may be more appropriate in a situation than another

Joint-cost Misc facts

Companies producing joint products often allocate joint product costs to individual products to better estimate the total cost of each product. -managers need to be careful when analyzing and interpreting product costs that include joint costs

3 commonly used methods for allocating support department costs to production departments

Direct method Sequential method Reciprocal services method

differences between Dm, Sm, RSm (cont)

SM / RSM considers inter-support-department service costs, while DM doesn't because it ignores the possibility that some support departments may also serve other support departments. - $0 is allocated to support departments

SM - Step 5

each support department's costs are allocated to other departments by multiplying the support department's total costs by the proportional usage of the departments to which costs are allocated.

support department examples

examples: - janitorial and Maintenance dept. - HR, legal, Management -Cafeteria