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Lecture Managerial accounting: Creating value in a dynamic business environment (10/e): Chapter 17 - Ronald W. Hilton, David E. Platt

Chapter 17, allocation of support activity costs and joint costs. After completing this chapter, you should be able to: Allocate service department costs using the direct method and the step-down method, use the dual approach to service department cost allocation, explain the difference between two-stage cost allocation with departmental overhead rates and activity-based costing (ABC),. | Allocation of Support Activity Costs and Joint Costs Chapter 17 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 17: Allocation of Support Activity Costs and Joint Costs Service Department (Cafeteria) Service Department (Accounting) Service Department (Personnel) Production Department (Machining) Production Department (Assembly) The Product Second Stage Allocations Production department overhead costs, plus allocated service department costs, are applied to products using departmental predetermined overhead rates. Service Department Cost Allocation First Stage Allocations Service department costs are allocated to production departments. 17- A service department such as the Personnel Department or the Cafeteria must exist in order for an organization to carry out its primary function. Therefore, the cost of running a service department is part of the cost incurred by | Allocation of Support Activity Costs and Joint Costs Chapter 17 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 17: Allocation of Support Activity Costs and Joint Costs Service Department (Cafeteria) Service Department (Accounting) Service Department (Personnel) Production Department (Machining) Production Department (Assembly) The Product Second Stage Allocations Production department overhead costs, plus allocated service department costs, are applied to products using departmental predetermined overhead rates. Service Department Cost Allocation First Stage Allocations Service department costs are allocated to production departments. 17- A service department such as the Personnel Department or the Cafeteria must exist in order for an organization to carry out its primary function. Therefore, the cost of running a service department is part of the cost incurred by the organization in producing goods or services. In order to determine the cost of those goods or services, all service department costs must be allocated to the production departments in which the goods or services are produced. For this reason, the costs incurred in an automobile plant’s Maintenance Department are allocated to all of the production departments that have machinery. The costs incurred in a hospital’s Human Resources Department are allocated to all of the departments that have personnel. Direct-patient-care departments, such as Surgery and Physical Therapy, are allocated their share of the Human Resources Department’s costs. The allocated costs become a portion of the factory overhead that is then applied to the cost of the finished product. Selecting Allocation Bases Personnel: Number of employees Receiving: Units handled Security: Square footage Power: Kilowatt hours Cafeteria: Number of employees Custodial: Square footage Accounting: Staff hours .