Kế toán, kiểm toán - Chapter 13: Allocating costs to responsibility centers

PowerPoint Presentation by LuAnn BeanProfessor of AccountingFlorida Institute of TechnologyAllocating Costs To Responsibility CentersCHAPTER 13© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Managerial Accounting 11E Maher/Stickney/WeilCHAPTER GOALChapter 13 discusses concepts and methods of assigning indirect costs such as overhead, to departments. Additionally, service department cost allocation and joint-process cost allocation are explained.☼☼DIRECT COST: DefinitionIs one that firms can identify specifically with, or trace directly to a particular product, department, or process.LO 1INDIRECT COST: DefinitionResults from joint use of a facility or service by several products, departments, or processes.LO 1What are common costs?Common costs are indirect costs that cannot be identified by a cost object.LO 1MANAGERS WANT TO KNOW!Why allocate indirect costs to products?Full product costs should be known, including allocated indirect costs, for pricing and planning decisions.LO 1MANAGERS WANT TO KNOW!SERVICE DEPARTMENTService department costs, a source of indirect costs, should be charged to users because:These costs should be covered by the contribution margin of revenue-generating departmentsUser departments must be aware of what costs their department must coverUser departments should not treat service departments as if they are freeLO 2COST ALLOCATIONThe cost allocation process has three steps:Assign direct costs to departmentsAllocate indirect costs to departmentsAllocate service department costs to production departmentsLO 3EXAMPLE: First BankFirst Bank (FB) has 4 departments. Production departments are the Commercial Department and the Personal Department. Service departments are Computer Services and Processing.Indirect costs are allocated to each department. Service department costs are allocated to production departments in order to properly price their products.LO 3ContinuedFBEXHIBIT 13.1LO 3What department would be responsible for cost allocation and preparing accounting reports for managerial use? FBEXHIBIT 13.2LO 3Step 1: Distribute direct overhead costs. FBEXHIBIT 13.2LO 3Step 2: Allocate indirect overhead costs. FBALLOCATIONFirst Bank has four indirect costs: security, property taxes, rent and utilities and miscellaneous. When allocating indirect costs, First Bank must select a cost driver for each indirect cost, although miscellaneous costs may not have a cost driver.LO 3FBEXHIBIT 13.4LO 3Cost drivers for First Bank’s indirect costs. Miscellaneous costs will be allocated evenly. FBEXHIBIT 13.5LO 3Example: proportionate allocation of indirect costs based on department use of indirect costs.FBEXHIBIT 13.6LO 3Allocation of security costs to four departments. Cost driver: # of security visits.EXHIBIT 13.6LO 3Allocation of property tax costs to four departments. Cost driver: book value of assets.EXHIBIT 13.6LO 3Allocation of rent and utilities to four departments. Cost driver: floor space.EXHIBIT 13.2LO 3Step 3: Allocate service department costs to production departments. How should service department costs be allocated?Service department costs should be allocated by one of three methods: direct, step, or reciprocal.LO 3MANAGERS WANT TO KNOW!SERVICE DEPARTMENT ALLOCATIONSUnder the direct method, service department costs are only allocated to production departments.Under the step method, service department costs are sequentially allocated to other service departments pro rata and finally to production departments. The reciprocal method employs matrix algebra to simultaneously allocate all department costs to each other.LO 3MARKETING and ADMINISTRATIVE COSTSAllocating marketing and administrative costs and finding a basis for allocation are difficult. They are separate from overhead costs that are allocated to production departments. But allocation is important for pricing and planning decisions.LO 5JOINT PROCESS: DefinitionSimultaneously converts common input into several outputs. Example: timber logs are processed into lumber of various grades and sizes.LO 6SPLITOFF POINT: DefinitionIs the stage of processing when two products are separated. LO 6The NRV method implies a matching of input costs with revenues generated by each output. LO 6The physical quantities method is used whenoutput product prices are highly volatileor when significant processing occursbetween split off and the 1st point of marketability. ALLOCATING JOINT-PROCESS COSTSOrganizations allocate joint costs for many reasons:Measuring performanceDetermining and responding to regulatory rate changesEstimating casualty lossesResolving contractual interests and obligationsFinancial and tax reportingLO 727End of CHAPTER 13