filess/acc3200leelecture194b11s-11qma15u.pptx Service Department Costing Appendix 4B & 11(p512-516) 1 ACC3200 HEEMIN LEE Heemin Lee Click to edit Master title style Click to edit Master text styles Second level Third level Fourth level Fifth level 1 agenda Service department allocations (Appendix 4B) Overview Allocation approaches Direct method Step-down method Reciprocal method Service department charges (Ch11) Overview Charging costs by behavior ACC3200 HEEMIN LEE 2 2 Service department allocations (appendix 4B) An operating department carries out the central purpose of the organization. E.g. the Accounting Department at Baruch College, the Assembly Department at General Motors, the Surgery Department at Mount Sinai Hospital, etc. A service department does not directly engage in operating activities. E.g. the Accounting Department at Macy’s, the Human Resources Department at Walgreens, etc. ACC3200 HEEMIN LEE 3 3 Overview: Interdepartmental Services Service Department Operating Department Costs of the service department become overhead costs to the operating department ACC3200 HEEMIN LEE 4 4 Allocation approaches 1. Direct method 2. Step-down method 3. Reciprocal method ACC3200 HEEMIN LEE 5 Reciprocal Services Service Department 1 Service Department 2 When service departments provide services to each other we call them reciprocal services. ACC3200 HEEMIN LEE 6 6 Direct Method Service Department (Cafeteria) Service Department (Custodial) Operating Department (Machining) Operating Department (Assembly) Interactions between service departments are ignored and all costs are allocated directly to operating departments. ACC3200 HEEMIN LEE 7 7 Direct Method ACC3200 HEEMIN LEE 8 8 Direct Method How much of the Cafeteria and Custodial costs should be allocated to each operating department using the direct method of cost allocation? ACC3200 HEEMIN LEE 9 9 Direct Method ACC3200 HEEMIN LEE 10 Allocation base: Number of employees $360,000 × 20 20 + 30 = $144,000 10 Direct Method ACC3200 HEEMIN LEE 11 Allocation base: Number of employees $360,000 × 30 20 + 30 = $216,000 11 Direct Method ACC3200 HEEMIN LEE 12 Allocation base: Square feet occupied $90,000 × 25,000 25,000 + 50,000 = $30,000 12 Direct Method ACC3200 HEEMIN LEE 13 Allocation base: Square feet occupied $90,000 × 50,000 25,000 + 50,000 = $60,000 13 Operating Department (Machining) Operating Department (Assembly) Step-down Method Once a service department’s costs are allocated, other service department costs are not allocated back to it. Service Department (Cafeteria) Service Department (Custodial) ACC3200 HEEMIN LEE 14 The allocation process is sequential and the sequence usually begins with the department that provides the greatest amount of service to other service departments. 14 Step-down Method ACC3200 HEEMIN LEE 15 There are three key points to understand regarding the step-down method: In both the direct and step-down methods, any amount of the allocation base attributable to the service department whose cost is being allocated is always ignored. Any amount of the allocation base that is attributable to a service department whose cost has already been allocated is ignored. Each service department assigns its own costs to operating departments plus the costs that have been allocated to it from other service departments. 15 Step-down Method ACC3200 HEEMIN LEE 16 Recall the data used in the direct method example. 16 Step-down Method Allocate Cafeteria costs first since it provides more service than Custodial. ACC3200 HEEMIN LEE 17 17 $360,000 × 10 10 + 20 + 30 = $60,000 Allocation base: Number of employees Step-Down Method $360,000 × 20 10 + 20 + 30 = $120,000 Step-Down Method Allocation base: Number of employees $360,000 × 30 10 + 20 + 30 = $180,000 Step-Down Method Allocation base: Number of employees New total = $90,000 original Custodial cost plus $60,000 allocated from the Cafeteria. Step-Down Method $150,000 × 25,000 25,000 + 50,000 = $50,000 Step-Down Method Allocation base: Square feet occupied $150,000 × 50,000 25,000 + 50,000 = $100,000 Step-Down Method Allocation base: Square feet occupied Reciprocal Method Interdepartmental services are given full recognition rather than partial recognition as with the step-down method. Service Department (Cafeteria) Service Department (Custodial) Operating Department (Machining) Operating Department (Assembly) Because of its mathematical complexity, the reciprocal method is rarely used. ACC3200 HEEMIN LEE 24 24 Quick Check Allocation bases: Business school administration costs (ADMIN): Number of employees Business Administration computer services (BACS): Number of personal computers The direct method of allocation is used. ACC3200 HEEMIN LEE 25 25 Quick Check How much cost will be allocated from Administration to Accounting? a. $ 36,000 b. $144,000 c. $180,000 d. $ 27,000 ACC3200 HEEMIN LEE 26 26 Quick Check How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department? a. $ 52,500 b. $135,000 c. $270,000 d. $ 49,500 ACC3200 HEEMIN LEE 27 27 Quick Check Allocation bases: Business school administration costs (ADMIN): Number of employees Business administration computer services (BACS): Number of personal computers The step-down method of allocation is used. ACC3200 HEEMIN LEE 28 28 Quick Check How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department? (Round to the nearest whole number) a. $35,250 b. $49,072 c. $18,000 d. $26,333 ACC3200 HEEMIN LEE 29 29 Service department charges (Ch 11) Service department costs are assigned to operating departments for a variety of reasons including: To encourage operating departments to wisely use service department resources To provide operating departments with more complete data for making decisions To help measure the profitability of operating departments To create an incentive for service departments to operate efficiently. ACC3200 HEEMIN LEE 30 30 Service department charges (Ch 11) The service department charges considered in this appendix can be viewed as a transfer price that is charged for services provided by service departments to operating departments. $ Operating Departments Service Departments ACC3200 HEEMIN LEE 31 31 Charging costs by behavior Whenever possible, variable and fixed service department costs should be charged separately. Variable service department costs should be charged to consuming departments according to whatever activity causes the incurrence of the cost. i.e., using a predetermined rate applied to the actual services consumed. ACC3200 HEEMIN LEE 32 Charging costs by behavior Fixed service department costs should be charged to consuming departments in lump sum amounts in proportion to their peak-period or long-run average servicing needs. The lump-sum amount should be based on budgeted fixed costs. The charges are based on the amount of capacity each consuming department requires. They should not vary from period to period. ACC3200 HEEMIN LEE 33 Budgeted variable and fixed service department costs should be charged to operating departments. 33 Sipco has a maintenance department and two operating departments: cutting and assembly. Variable maintenance costs are budgeted at $0.60 per machine hour. Fixed maintenance costs are budgeted at $200,000 per year. Data relating to the current year are: Allocate maintenance costs to the two operating departments. Example 1 ACC3200 HEEMIN LEE 34 34 POHR Example 1 ACC3200 HEEMIN LEE 35 Actual Hours Used 35 Example 1 ACC3200 HEEMIN LEE 36 Percent of peak-period capacity. Budgeted 36 Example 2 Reese corporation operates a Medical Service Department for its employees. Charges to the company’s operating departments for the variable costs of the Medical Service Department are based on the actual number of employees in each department. Charges for the fixed costs of the Medical Service Department are based on the long-run average number of employees in each operating department. For the Medical Service Department, variable costs are budgeted at $60 per employee, and fixed costs are budgeted at $600,000 per year. Actual Medical Service Department costs for the most recent year were $105,400 for variable costs and $605,000 for fixed costs ACC3200 HEEMIN LEE 37 Example 2 Data concerning employees in the three operating departments follow: 1. Determine the Medical Service Department charges for the year to each of the operating departments: Cutting, Milling, and Assembly. 2. How much, if any, of the Medical Service Department costs for the year should not be allocated to the operating departments? CuttingMillingAssembly Budgeted number of employees600300900 Actual number of employees for the most recent year500400800 Long-run average number of employees6004001,000 ACC3200 HEEMIN LEE 38 Example 2 1. Determine the Medical Service Department charges for the year to each of the operating departments: Cutting, Milling, and Assembly. CuttingMillingAssembly Variable cost allocation: $60*500 (actual) $60*400 $60*800$30,000$24,000$48,000 Fixed cost allocation: $600,000*600/2,000 $600,000*400/2,000 $600,000*1,000/2,000180,000120,000300,000 Total allocation cost$210,000$144,000$348,000 ACC3200 HEEMIN LEE 39 Example 2 2. How much, if any, of the Medical Service Department costs for the year should not be allocated to the operating departments? Actual costs = 105,400+ 605,000 = $710,400 Total costs that should be charged = 210,000+144,000+348,000 = $702,000 Therefore, the amount that should not be charged = $710,400 - $702,000 = $8,400 ACC3200 HEEMIN LEE 40 40 End of lecture 19 41 ACC3200 HEEMIN LEE 41 Sheet1 Service DepartmentsOperating Departments CafeteriaCustodialMachiningAssembly Departmental costs before allocation$ 360,000$ 90,000$ 400,000$ 700,000 Number of employees15102030 Square feet occupied5,0002,00025,00050,000 &A Page &P Sheet2 &A Page &P Sheet3 &A Page &P Sheet4 &A Page &P Sheet5 &A Page &P Sheet6 &A Page &P Sheet7 &A Page &P Sheet8 &A Page &P Sheet9 &A Page &P Sheet10 &A Page &P Sheet11 &A Page &P Sheet12 &A Page &P Sheet13 &A Page &P Sheet14 &A Page &P Sheet15 &A Page &P Sheet16 &A Page &P Service DepartmentsOperating Departments CafeteriaCustodialMachiningAssembly Departmental costs before allocation360,000$ 90,000$ 400,000$ 700,000$ Number of employees15 10 20 30 Square feet occupied5,000 2,000 25,000 50,000 Sheet1 Service DepartmentsOperating Departments CafeteriaCustodialMachiningAssembly Departmental costs before allocation$ 360,000$ 90,000$ 400,000$ 700,000 Number of employees1062030 Square feet occupied5,0002,00025,00050,000 &A Page &P Sheet2 Service DepartmentAllocation Base CafeteriaNumber of employees CustodialSquare feet occupied &A Page &P Sheet3 &A Page &P Sheet4 &A Page &P Sheet5 &A Page &P Sheet6 &A Page &P Sheet7 &A Page &P Sheet8 &A Page &P Sheet9