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Service Department and Joint
Cost Allocation
Chapter 11
Copyright 2011 by The McGraw-Hill Companies, Inc. ll rights reser!e".McGraw-Hill#Irwin
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Service Department Cost Allocation
Service Department:Department that provides servicesto other subunits in the organization.
User Department:Department that uses the functions
of service departments.
L.O. 1 Explain why service costs are allocated.
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Cost Allocation: Direct MethodL.O. 2
llocate service department costs using the direct method.
Service Department:!nformation Systems
"S#$
User Department:%illtop &ine
"'#$
Service Department:dministration
"S($
User Department:'acific &ine
"'($
Direct method:)harges costs of service departments to user departmentswithout ma*ing allocations among service departments.
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Cost Allocation: Step Method
L.O. 3 llocate service department costs using the step method.
+he step method allocates some servicedepartment costs to other service departments.
,nce an allocation is made from a servicedepartment no further allocations are madebac* to that service department.
-enerally allocate in order of proportion ofservices provided to other service departments.
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Cost Allocation: Reciprocal Method
L.O. 4 llocate service department costs using the reciprocal method.
+he reciprocal method recognizes all servicesprovided by any service department including
services provided to other service departments.
!t accounts for cost flows among servicedepartments providing services to each other.
!t re/uires a simultaneous e/uation solution.
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The Reciprocal Method
and Decision Making
L.O. 5 Use the reciprocal method for decisions.
Suppose that the variable cost in !nformation Services "S#$is 0(11111 "out of the total of 0211111$ and the variablecost in dministration "S($ is 03411111 "out of 04111111$.
5et6s repeat the reciprocal cost analysis substitutingthe variable costs from the total costs.
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The Reciprocal Method
and Decision Making
LO
5
+he total variable cost of !nformation Services when youconsider the use of dministration by !nformation Servicesis 0#111111.
+he total cost savings that would come from eliminating!nformation Services are the 0#111111 variable costsplus any avoidable fixed costs.
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Allocation of Joint Costs
L.O. 6 Explain why 7oint costs are allocated.
8oint cost is the cost of a manufacturingprocess with two or more outputs.
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Allocation of Joint Costs
8oint 'roducts
,utputs from a common input
and common production process Split9,ff point
Stage of processing that separates
two or more products
LO
6
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Allocation of Joint Costs
LO
6
Evaluating executive performance
Determining the inventory value
et realizable value method
'hysical /uantities method
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Allocation of Joint Costs
L.O. 7 llocate 7oint costs using the net realizable value method.
et realizable value method:8oint cost allocation based on the proportionalvalues of the products at the split9off point.
et realizable value ";
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Physical !antities Method
L.O. 8 llocate 7oint costs using the physical /uantities method.
8oint cost allocation is based on measurement ofthe volume weight or other physical measure ofthe 7oint products at the split9off point.
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Sell or Process "!rther
L.O. 9 Explain how cost data are used inthe sell9or9process9further decision.
Suppose ))) can sell 5o9grade coal for 0=41111at the split9off point or process it further to ma*emid9grade coal.
&id9grade coal would sell for 0441111 andadditional processing costs would be 041111.
dditional revenue: 0#11111dditional cost: 0 41111 >>
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Sell or Process "!rther
LO
9
Differential nalysis)arlyle )oal )ompany
;evenues5ess: Separate processing costs&argin
0=41111 9190=41111
0441111 411110411111
0#11111 411110 41111
Sell5o9-rade
)oal
'rocess?urther
"&id9-rade$
Differential;evenue@
)osts
et gain fromprocessing
further
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Deciding #hat to Do $ith %y&prod!cts
L.O. 10ccount for by9products.
Ay9products are outputs of 7oint production processesthat are relatively minor in /uantity or value.
ðod #:+he net realizable value from sale of the by9productsis deducted from the 7oint costs before allocationto the main products.
ðod (:+he proceeds from sale of the by9product are treatedas other revenue.
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Calc!lation of the Reciprocal Method
'sing Spreadsheets
L.O. 11 "ppendix$ Use spreadsheets to solvereciprocal cost allocation problems.
?or any department we can state the e/uation:
+otal costs B Direct costs C llocated costs
E/uations can be expressed in matrix form andsolved using the matrix functions of a spreadsheet
program such as &icrosoft Excel.
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(nd of Chapter 11
Copyright 2011 by The McGraw-Hill Companies, Inc. ll rights reser!e".McGraw-Hill#Irwin