AFM481 Final Exam Material - Chapter 8 Summary (Thorough).docx

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University of Waterloo
Accounting & Financial Management
AFM 481
Grant Russell

AFM481 - Advanced Cost Accounting Professor Grant Russell Final Exam Material Chapter 8: Measuring and Assigning Support Department Costs A Common Cost or Indirect, Overhead or Joint Cost is the cost for a resource that is shared among 2 or more departments. Support Departments provide services internal to the organization that support the operating departments. (e.g. accounting, info systems, HR, marketing, R&D and admin) – treated as period expenses How to Allocate Support Department Costs 1. Identify the support and operating department cost pools. 2. Assign costs to cost pools. 3. For each support department cost pool, choose an allocation base.  Allocation base for purchasing department costs: $ dollar amount of purchases  Allocation base for HR and accounting activities: # of employees or time spent  Allocation base for laundry department: Kilograms of laundry 4. Choose and apply a method for allocating support department costs to operating departments.  Direct Method  Step-Down Method  Reciprocal Method 5. If relevant, allocate support costs from the operating departments to units of goods or services. Direct Method Allocation (Using an Allocation Base):  Allocates the costs of all support departments to the operating departments only  No costs are allocated among support departments. No interactions among support departments are reflected in this method. Step-Down Method of Allocation (Using an Allocation Base):  Allocates support department costs one department at a time to remaining support and operating departments in a cascading manner until all support department costs have been allocated.  Begin by ranking each support department according to the amount of service provided to other support departments. Then, costs for the first support department chosen are allocated to the remaining departments, both support and operating. Reciprocal Method of Allocation (Using an Allocation Base):  Allocates costs among support departments first, and then from support departments to operating departments.  Allows for all the interactions among departments. Reflects support department interactions most accurately. 1. Allocating Support Costs Among Support Departments 10 employees outside the admin department; 2 of them work in custodial services:  Custodial Services = $60,360 + 0.2 (Administration) o Because 2/10 of administration cost would be allocated to custodial services Of the 990 square metres that are not in custodial services, 90 square metres are in administration.  Administration = $98,240 + 0.09 (Custodial Services) o Because 90/990 of custodial services would be allocated to administration Custodial Services = $60,360 + 0.2 [$98,240 + (0.09 * Custodial Services)] Custodial Services = $81,475; Administration = $105,573 2. Allocating Support Costs to Operating Departments Administration Custodial Instrument Music Lessons Total Services Sales Cost Allocation Bases: Square Metres 90 800 100 990 Employees 2 5 3 10 Department Cost $98,240 $60,360 $263,800 $93,600 $516,000 Allocation of 81,475 * ($81,475) 81,475 * 81,475 * 100/990 Custodial 90/990 = 7,333 800/990 = = 8,147 Services 65,995 Allocation of ($105,573) 105,573 * 105,573 * 5/10 = 105,573 * 3/10 = Administration 2/10 = $52,786 $31,672 $21,115 Total Allocated $0 $0 $382,581 $133,419 $516,000 Cost Single-Rate Allocation: using only one base to allocate both fixed and variable costs; lik
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