Chapter 21 - Cost allocation and performance measurement. After completing this chapter you should be able to: Distinguish between direct and indirect expenses and identify bases for allocating indirect expenses to departments; explain controllable costs and responsibility accounting; analyze investment centers using return on assets, residual income, and balanced scorecard; analyze investment centers using profit margin and investment turnover. | Chapter 21 COST ALLOCATION AND PERFORMANCE MEASUREMENT Chapter 21: Cost Allocation and Performance Measurement Jobs Direct Labor Hours Machine Hours Raw Materials Cost Departmental Allocation Bases Stage Two: Costs applied to jobs Stage One: Costs assigned to departments TWO-STAGE COST ALLOCATION Service Dept. 2 Service Dept. 3 Service Dept. 1 Operating Operating Dept. 2 Operating Dept. 3 P 1 Service departments such as maintenance, accounting, human resources provide support to operating departments. Service department costs are assigned to an operating department based on the operating department’s use of the service. These costs are then combined with the operating department’s overhead and allocated to jobs or products based on a predetermined overhead rate for the operating department. An operating department’s predetermined overhead rate may be based on direct labor hours, machine hours, or some other activity measure. With the Activity-Based Costing (ABC) method, we recognize that many activities within a department drive overhead costs. A B C A C B ACTIVITY-BASED COST ALLOCATION Identify activities and assign indirect costs to those activities. Central idea . . . Products require activities. Activities consume resources. P 2 With the Activity Based Costing (ABC) method, we recognize that many activities within a department drive overhead costs. Activity-based costing attempts to better allocate costs to the proper users of overhead by focusing on activities. Costs are traced to individual activities and then allocated to cost objects. Our job is to identify the activities and assign indirect costs to those activities. Then we measure the consumption of activities by products in order to assign the indirect costs to those products. ACTIVITY-BASED COSTING STEPS Identify activities that consume resources. Assign costs to a cost pool for each activity. Identify cost drivers associated with each activity. Compute overhead rate for each cost pool: Assign | Chapter 21 COST ALLOCATION AND PERFORMANCE MEASUREMENT Chapter 21: Cost Allocation and Performance Measurement Jobs Direct Labor Hours Machine Hours Raw Materials Cost Departmental Allocation Bases Stage Two: Costs applied to jobs Stage One: Costs assigned to departments TWO-STAGE COST ALLOCATION Service Dept. 2 Service Dept. 3 Service Dept. 1 Operating Operating Dept. 2 Operating Dept. 3 P 1 Service departments such as maintenance, accounting, human resources provide support to operating departments. Service department costs are assigned to an operating department based on the operating department’s use of the service. These costs are then combined with the operating department’s overhead and allocated to jobs or products based on a predetermined overhead rate for the operating department. An operating department’s predetermined overhead rate may be based on direct labor hours, machine hours, or some other activity measure. With the Activity-Based Costing (ABC) method, we .
