COST ALLOCATION COST ALLOCATION Direct Method Direct M - PDF document

COSTALLOCATION COST ALLOCATION DirectMethod Direct Method Allocates spport costs onl to Operating • Allocates s u pport costs only to Operating  No Interaction between Support Departments prior to allocation No Interaction between Support Departments prior to allocation 2 Direct Method 3 Ste p  Allocates support costs to other support departments and to operating Allocates support costs to other support departments and to operating departments that partially recognizes the mutual services provided among all One-Way Interaction between Support Departments prior to allocation 4 Step-Down Method ReciprocalMethod Reciprocal   Allocatessupportdepartmentcoststo  Allocates   department  costs  operatingdepartmentsbyfullyrecognizing themutualservicesprovidedamongallsupportdepartments FullTwoWayInteractionbetweenSupport Departmentspriortoallocation Departments   allocation 6 RilMthd R ec i M e th o d Choosing Between Methods Reciprocal is the most precise Direct and Step-Down are simple to compute and understand Direct Method is widel y used 8 COST ALLOCATION PROBLEM (Direct, Step-Down, & Reciprocal Methods) 9 A f th fid d ibl t dtt t fll COST ALLOCATION PROBLEM (Direct, Step-Down, & Reciprocal Methods) A summar f th e fi an var esuppor d o DIRECT DATA DATA Cost allocation computations: STEP- DATA Cost allocation computations: RECIPROCAL DATA DATA Cost allocation computations: Footnotes: Dual-Rate Method, Budgeted vs. Actual Costs, & Practical Capacity vs. Actual Quantities Chlt IidfihltbdiPlAltTh Ch oco t I s a pro d ucer o f prem i um c h oco t e b P a l o Alt company has a separate division for each of its two products: dark chocolate and milk chocolate. Chocolatpurchases ingredients from Wisconsin for its Dark ChocolatedivisionandfromLouisianaforitsMilkChocolatedivision.Both ChocolatedivisionandfromLouisianaforitsMilkChocolatedivision.Both locations are the same distance from Chocolat'sPalo Alto plant.ChocolatInc. operates a fleet of trucks as a cost center that charges the diiifiblt(didfl)dfidt(hil di v i s i or var i a e cos t s r i vers an df ue an dfi xe cos t s ( l depreciation, insurance, and registration fees) of operating the fleet. Each division is evaluated on the basis of its operating income. Last year, the fleet had a p ractical ca p acit of 50 round-tri p s between the Palo Alto gppy p plant and the two suppliers. It recorded the following information: 15 Chocolat Inc. decides to examine the effect of usin g the dual-rate method for allocatin g truck Dual-Rate Method, Budgeted vs. Actual Costs, & Practical Capacity vs. Actual Quantities ,g g costs to each round-trip.At the start of the year, the budgeted costs were: Variable cost per round - trip $ 1500 Variable cost per round - trip $ 1 , Fixed costs $40,000The actual results at year-end for the 45 round-trips made were: Variable costs $60,750Fixed costs $36,000 Total $96,750 16 1. Using the dual-rate method, what are the costs allocated to the Dark Chocolate Division and the Milk Chocolate Division when (a) variable costs are allocated using the bud eted rate per round-trip and actual round-trips used b y each division and when ( b ) fixed costs are allocated based on the budgeted rate per round-trip and round-trips budgeted for each division? 17 2. From the viewpoint of the Dark Chocolate Division, what are the effects of using the dl t thd th th th il t thd? d ua eme d th an th eme d s ? dual rate changes how the fixed indirect cost component is treated. By using budgeted trips made the Dark Chocolate Division is unaffected by changes from its own budgeted trips made , the Dark Chocolate Division is unaffected by changes from its own budgeted usage or that of other divisions. eted ratesandactual tri p are used for allocation ( see re q uirement 1.b. of g p (q problem 15-17 ) , the Dark Chocolate Division is assi g ned the same $24,000 for fixed costs as under the dual-rate method because it made the same number of trips as budgeted. However note that the Milk Chocolate Division is allocated $16000 in fixed trucking costs However , note that the Milk Chocolate Division is allocated $16 , 000 in fixed trucking costs under the dual-rate system , compared to $800  15 actual trips = $12,000 when are used for allocation. As such, the Dark Chocolate Division is not made to appear disproportionately more expensive than the Milk Chocolate Division simply because the latter did not make the number of trips it budgeted at the start of the year. 18 Reci rocal Cost Allocation p E-books,anonlinebookretailer,hastwooperatingdepartments-CorporateSalesandConsumerSales-andtwosupportdepartments-HumanResourcesand Sstems department condcts and Each u marketingoperationsindependently.E-booksusesnumberofemployeestoallocateHumanResourcescostsandprocessingtimetoallocateInformation : 19 Reci rocal Cost Allocation Consider E-books again. The controller of E-books reads a widely used textbook that states that “the reciprocal method is conceptually the most defensible.” He seeks your assistance. p 20 1. Describe the ke y features of the reciprocal method. The reciprocal allocation method explicitly includes the mutual services provided The reciprocal allocation method explicitly includes the mutual services provided among all support departments. Interdepartmental relationships are fully incorporated into the support department cost allocations allocations . 21 2. Allocate the support departments’ costs (Human Resources and Information St) t th t ti dtt i th il thd Sy s t ) t th e woopera g d sus g th erec d . 22 Reciprocal method using repeated iterations 23 3. In the case presented in this exercise, which method (direct, step-down, or il) ld d? Wh? rec i proca l) wou ld y ourecommen d? Why? The reciprocal method is more accurate than the direct and step-down methods when The reciprocal method is the preferred method, although the numbers for the year materially different across the alternatives. 24