Ch 8 Summary.docx

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Accounting & Financial Management
AFM 481
Grant Russell

Chapter 8 – Measuring and Assigning Support Department Costs Support Department Cost Allocation - Common cost: cost of a resources that is shared between 2+ depts. - Operating departments: depts./divisions that mfg goods/services for external customers or clients o Mfg: produce o Service: produce services o Retail: sell merch - Support department: depts. that provide internal services to operating depts. o Staff cafeteria o Human resources o R&D Objectives for Support Department Cost Allocation - Treated as period expenses under GAAP → allocated for objectives other than f/s reporting - Costs form support services may need to be allocated (to value the savings, or for outsiders) - Managers are responsible for their dept’s use of support services (& managers of support services are responsible for their dept costs) → an effective allocation system will promote both sets of managers to be efficient The Process of Allocating Support Department Costs 1. Clarify the purpose of the allocation 2. Identify support & operating dept cost pools a. Departments are usually used as cost pols because organizations already accumulate costs by dept b. Another factor: ability to identify an appropriate allocation base c. Separating support costs = more accurate cost allocations (in general) 3. Assign costs to cost pools a. Many costs can be directly traced (employee salaries, supplies) b. Facilities costs – insurance, utilities, prop. tax, maintenance – traced to cost pool then allocated among all support and op depts 4. For each support dept cost pool, choose an allocation base a. Best: cost driver b. Chosen to reflect some of the activities provided 5. Choose and apply a method for allocating support dept costs to operating depts. a. Direct method b. Step-down method c. Reciprocal method 6. If relevant, allocate support costs from operating d1epts. to units of goods/services The Direct Method - Allocate the costs of all support depts. to the operating department only - Interaction between support depts. are not reflected - Use the support department’s allocation base to allocate the costs to each op depts. - Calculate the % of each support depts. cost allocated to each op depts. Step-Down Method - Allocate support dept. costs of one dept. at a time to remaining support and op depts. - Cascading manner – until all support department costs are allocated - First rank each support department according to the amount of service provided to other support depts. - Cost of the 1 dept chosen is allocated to the remaining depts The Reciprocal method of Allocation - Simultaneously allocates costs among support depts. and then from support depts. to op depts. - Performed in 2 phases – first support costs allocated among each other - Create a set of equations to solve simultaneously - The allocated costs for each support dept includes costs allocated from other support depts. - Next, the new total cost per support dept is allocated to all other depts. (support & op) Single- vs. Dual-Rate Allocations - Single-rate allocation: using only one base to allocate both fixed and var costs o Likely mismeasures resources sued because the same base is inappropriate for all costs - Dual-rate allocation: support costs are separated to fixed and var costs pools and cost drivers and identified for the var cost pools o More accurately reflects the flow of resources o Drawback: costs more to develop & maintain Support Cost Allocation, Info Quality & Decision Making Relevant Support Costs for Decision Making - Relevant support costs are difficult to measure
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