SUPPORTING DEPARTMENT

COST ALLOCATION
Prepared by
Dahlia Sari | Evony Silvino | Nureni Wijayati | Adela Pravita | Celine Cecilia

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Menyiapkan Pemimpin Inklusif, Relevan & Bereputasi

 DEPARTMENTS

Operating Department Service Department

(Production Department) (Support Department)
adds value to products ● provides the services
● assist other operating and
support departments

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 Selecting Cost Allocation Base (Cost Driver)
Department

Plant Information
Personnel Security Receiving Accounting Power
Maintenance System

Numbers of Unit Number of Numbers of Unit Number of Unit

employees produced employees employees produced employees produced

Number of Machine- Square Computer- Accountant Kilowatt-

Cost drivers

Unit received
full-timers hours footage hours salaries hours

Total hours Direct labor Unit Number of Raw material Production Machine-
spent hours produced computers purchased costs hours

Total hours Direct labor Inventory Number of Inventory Direct labor

Gross margin
spent costs balance software balance hours

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 SERVICE DEPARTMENT COST ALLOCATION

Support Department Production Department

First Stage Allocations
Support department costs are allocated to
production departments.
Human
Mixing
Resources

The Product

Power Packaging

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 SERVICE DEPARTMENT COST ALLOCATION

Support Department Production Department Second Stage Allocation

Production department overhead costs, plus
allocated support department costs, are
applied to products using departmental
Human predetermined overhead rates.
Mixing
Resources

The Product

Power Packaging

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 METHODS OF ALLOCATING SUPPORT
COSTS TO PRODUCTION DEPARTMENT

Direct Step-Down Reciprocal

Allocates support Allocates support Allocates costs by
department costs to department costs to services provided
production other support among all
departments only. departments and to support departments.
production
departments.
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 Data Used for Illustrations
SUPPORT DEPARTMENT PRODUCTION DEPARTMENT
Human
Power Mixing Packaging TOTAL
Resources
Budgeted overhead costs before any
inter-department cost allocations $110,000 $150,000 $100,000 $280,000 $640,000
Support work furnished:
By Human Resources
Budgeted payroll ___________ $90,000 $105,000 $105,000 $300,000
Percentage ___________ 30% 35% 35% 100%
By Power
Budgeted kilowatt-hours 5,000 ___________ 15,000 45,000 65,000
Percentage 8% ___________ 23% 69% 100%

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 Direct Method
Support Department Production Department

Human
Mixing
Resources
Cost of support
between support
departments are
ignored and all
costs are
allocated directly
to production
departments.
Power Packaging

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 Direct Method Illustrated
Support Department Production Department

Human Resources $55,000

Mixing
$110,000

$55,000

$37,500

Power
$150,000 Packaging
$112,500

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 Data Used for Illustrations
SUPPORT DEPARTMENTS PRODUCTION DEPARTMENTS
Human
Power Mixing Packaging TOTAL
Resources
Budgeted overhead costs before any
inter-department cost allocations $110,000 $150,000 $100,000 $280,000 $640,000
Support work furnished:
By Human Resources
Budgeted payroll ___________ $90,000 $105,000 $105,000 $300,000
Percentage ___________ 30% 35% 35% 100%
By Power
Budgeted kilowatt-hours 5,000 ___________ 15,000 45,000 65,000
Percentage 8% ___________ 23% 69% 100%

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 Direct Method Illustrated (cont.)
SUPPORT DEPARTMENT PRODUCTION DEPARTMENT
Human
Power Mixing Packaging TOTAL
Resources
Budgeted overhead costs before any
inter-department cost allocations $110,000 $150,000 $100,000 $280,000 $640,000
Allocation of Human Resources
(1/2, 1/2)¹ (110,000) 55,000 55,000

Allocation of Power
(1/4, 3/4)² ___________ (150,000) 37,500 112,500 ___________
Total Budgeted overhead
of operating department _____0_____ _____0_____ 192,500 447,500 640,000

¹Base is (105,000 + 105,000) or 210,000 hours; 105,000 ÷ 210,000 = 1/2; 105,000 ÷210,000 = 1/2
²Base is (15,000 + 45,000) or 60,000 hours; 15,000 ÷ 60,000 = 1/4; 45,000 ÷ 60,000 = 3/4
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 Step-Down Method

Support Department Production Department

Support department
costs are allocated Human
Mixing
to other support Resources
departments and
to production
departments, usually
starting with the
support department
that serves the
largest number of
other support Power Packaging
departments.
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 Step-Down Method

Support Department Production Department

Power will have a Human

Once a service Mixing
Resources
new
department’s
total to allocate
costs are
to production
allocated,
departments: its
other service
own costs plus
departments’
those costs
costs are not
allocated from
allocated
the Human
back to it. Power Packaging
Resources

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 Step-Down Method Illustrated

Support Department Production Department

Human Resources $38,500

Mixing
$110,000

$38,500
$33,000

$45,750

Power
$150,000 + $33,000 = Packaging
$183,000 $137,250

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 Step-Down Method Illustrated (cont.)
SUPPORT DEPARTMENT PRODUCTION DEPARTMENT

Human
Power Mixing Packaging TOTAL
Resources
Budgeted overhead costs before any inter-
department cost allocations $110,000 $150,000 $100,000 $280,000 $640,000
Allocation of Human Resources
(6/20, 7/20, 7/20)¹ (110,000) 33,000 38,500 38,500
183,000
Allocation of Power
(1/4, 3/4)² ___________ (183,000) 45,750 137,250 ___________
Total Budgeted overhead
of operating department _____0_____ _____0_____ 184,250 455,750 640,000

¹Base is (90,000 + 105,000 + 105,000) or 300,000 hours; 90,000 ÷ 300,000 = 6/20; 105,000 ÷ 300,000 = 7/20; 105,000 ÷
300,000 = 7/20
²Base is (15,000 + 45,000) or 60,000 hours; 15,000 ÷ 60,000 = 1/4; 45,000 ÷ 60,000 = 3/4
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 Reciprocal Method

Support Department Production Department

Human
Mixing
Resources
Support
department
costs are allocated
to other support
departments and
to production
departments.
Power Packaging

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 Reciprocal Method Illustrated
Support Department Production Department

Human Resources $43,543

$110,000 + $14,409 Mixing
= $124,409

$43,543
$37,323

$14,409
$43,228
Power
$150,000 + $37,323 = Packaging
$187,323 $129,685

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 Reciprocal Method Illustrated (cont.)

01 Express Support-Department Budgeted Costs and Reciprocal

Relationships in the Form of Linear Equations
HR = $110,000 + 0.08 P …..(1)
P = $150,000 + 0.3 HR …..(2)

Solve the Set of Linear Equations to Obtain the Complete

02 Reciprocated Budgeted Costs of Each Support Department
Substituting equation (1) into (2) Substituting this into equation (1)
P = $150,000 + [0.3($110,000 + 0.08 P)] HR = $110,000 + 0.08($187,323)
P = $150,000 + $33,000 + 0.02 P HR = $124,409
0.98 P = $183,000
P = $187,323
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 Reciprocal Method Illustrated (cont.)

03 Allocate the Complete Reciprocated Budgeted Costs of Each

Support Department to All Other Departments
Human Resources Department Costs = $124,409
To Power Department (6/20) x $124,409 = $37,323
To Mixing Department (7/20) x $124,409 = $43,543
To Packaging Department (7/20) x $124,409 = $43,543

Power Department Costs = $187,323

To Human Resources Department (1/13) x $187,323 = $14,409
To Mixing Department (3/13) x $187,323 = $43,228
To Packaging Department (9/13) x $187,323 = $129,685

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 Reciprocal Method Illustrated, (cont.)
SUPPORT DEPARTMENT PRODUCTION DEPARTMENT

Human
Power Mixing Packaging TOTAL
Resources
Budgeted overhead costs before any inter-
department cost allocations $110,000 $150,000 $100,000 $280,000 $640,000
Allocation of Human Resources
(6/20, 7/20, 7/20)¹ (124,409) 37,323 43,543 43,543
(14,409) 187,323
Allocation of Power
(1/13, 3/13, 9/13)² 14,409 (187,323) 43,228 129,685
Total Budgeted overhead
of operating department _____0_____ _____0_____ 186,772 453,228 640,000

¹Base is (90,000 + 105,000 + 105,000) or 300,000 hours; 90,000 ÷ 300,000 = 6/20; 105,000 ÷ 300,000 = 7/20; 105,000 ÷
300,000 = 7/20
²Base is (5,000 + 15,000 + 45,000) or 65,000 hours; 5,000 ÷ 65,000 = 1/13; 15,000 ÷ 65,000 = 3/13; 45,000 ÷ 65,000 = 9/13

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 Choosing between Method

Step-Down
+ is simple to compute and
understand
- accuracy disadvantage

Reciprocal Direct Method

+ is simple to compute and
+ is the most precise
understand
- is more complex to
+ is widely used and
compute
- accuracy disadvantage

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 Allocating Common Cost

A common cost is a cost of operating a facility, activity or like cost

object that is shared by two or more users.
Stand-alone cost allocation
01 Weights by considering each user

2 methods for
allocating common
cost
Incremental cost allocation
Ranks the individual users of a cost
02 object 22
 Data Used for Illustration

Lily, a successful business woman in New York has been invited to a meeting in Ohio

The round-trip New York–Ohio airfare costs $1,300

Lily is also invited to a meeting with an employer in Pennsylvania.

The round-trip New York–Pennsylvania airfare costs $700

Lily decides to combine the two recruiting trips into a

New York–Ohio–Pennsylvania–New York trip that will cost $1,700

The $1,700 is a common cost that benefits both business partners because it is less than the $2,000
($1,300 + $700) that the business partners would have to pay if Lily meet with them independently.

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 Stand Alone Cost Allocation

The Stand Alone Cost Allocation determines the weights for cost
allocation by considering each user of the common cost facility or
activity as a separate entity.

$1.300
Business partner from Ohio: x $1.700 = 0,65 x $1.700 = $1.105
$1.300 + $700

$700
Business partner from Pennsylvania: x $1.700 = 0,35 x $1.700 = $595
$1.300 + $700

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 Incremental Cost Allocation

The incremental cost-allocation method ranks the individual users of

a cost object in the order of users most responsible for the common
cost and then uses this ranking to allocate cost among those users.

Business Partner’s base Cost Allocated Cumulative Cost Allocated

Ohio (primary) $1.300 $1.300

Pennsylvania (incremental) $400 ($1.700 - $1.300) $1.700

Total $1.700
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 ASSIGNMENT

EXERCISES 16-21, 16-22

PROBLEM 16-31

Single rate method and dual-rate method.

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THANK YOU

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