PART ONE – D1

COST
MANAGEMENT
COST OF
GOODS
SOLD
OVERHEAD
COSTS

3
WHY DO WE NEED
TO ALLOCATE COST
OF SHARED
SERVICES?
 Service department costs are considered part of overhead (indirect
costs). Thus, they cannot feasibly be traced to cost objects and must be
allocated to the operating departments that use the services.

4
TERMINOLOGIES

Cost Pool – an account which a variety of similar costs are

accumulated prior to allocation to cost objects.

Cost Object – final destination of cost pools

Cost Driver – used as basis for cost allocation

5
SHARED SERVICES
COST ALLOCATION
METHOD 01 – DIRECT
Charge costs of service departments to user departments without
making allocations among service departments.
When calculating the usage ratios for the different operating
departments, count only the usage of the shared service departments
by the operating departments. The usage of shared service
departments that takes place in the other service departments is
excluded because service departments will not be allocated any costs
from other service departments.

6
 The reciprocal method is the most complicated and advanced of the three methods
of shared services cost allocation because it recognizes all of the services provided
by the shared service departments to the other shared service departments

SHARED
SERVICES COST
ALLOCATION 7

METHOD 02 – 7
SHARED SERVICES COST ALLOCATION
METHOD 03 – STEP DOWN
In the step-down method the services the
shared service departments provide to each
other are included, but only one allocation of
the costs of each service department is made.
After the costs of a particular service
department have been allocated, that service
department will not be allocated any additional
costs from other service departments.

8
1. SHARED SERVICE ALLOCATION
Adam Corporation manufactures computer tables and has the following budgeted indirect manufacturing
cost information for next year.

Support Departments Operating Departments Total

Maintenance Systems Machining Fabrication

Budgeted 360,000 95,000 200,000 300,000 955,000

Overhead
Support work furnished:
From 10% 95% 40% 100%
Maintenance
From 5% 45% 50% 100%
Systems

9
 QUESTIONS
1. If Adam uses the direct method to allocate support department costs to
production departments, the total overhead (rounded to the nearest dollar) for
the Machining Department to allocate to its products would be _________

2. If Adam uses the step-down method, beginning with the Maintenance

Department, to allocate support department costs to production departments,
the total overhead (rounded to the nearest dollar) for the Machining
Department to allocate to its products would be _________

3. If Adam uses the reciprocal method to allocate support department costs to

production departments, the total overhead (rounded to the nearest dollar) for
the Machining Department to allocate to its products would be _________

10
2. A company has the following service department costs and allocation bases:

Service Department Costs to be Allocated Allocation Base

Information Technology $120,000 CPU cycles
Custodial Services 40,000 Floor space
Total $160,000

The production departments have the following pre-allocation costs and allocation base amount:

Production Dept Pre-allocation Costs CPU Cycles Used % Floor Space in Sq Ft %

Milling $300,000 60,000,000 62.5% 56,000 70%
Finishing $ 200,000 36,000,000 37.5% 24,000 30%
$500,000 96,000,000 100% 80,000 100%
11
JOINT PRODUCT
COST
The main issue with joint products is how to account for the joint
costs (those costs incurred prior to the splitoff point) and how to
allocate the joint costs to the separate products. Accurate allocation
is needed primarily for financial reporting purposes and pricing
decisions. The inventory cost of each unit of each joint product
needs to be determined accurately so that the balance sheet will be
accurate. Since the inventory cost of each unit becomes its cost of
goods sold when it is sold, the amount of cost to be expensed to
COGS for each unit sold is needed

12
RELATIVE SALES VALUE AT
SPLITOFF METHOD (OR GROSS
MARKET VALUE METHOD)
Under the Relative Sales Value at Splitoff method, joint
costs are allocated on the basis of the sales values of each
product at the splitoff point, relative to the total sales
value of all the joint products.
ESTIMATED NET REALIZABLE
VALUE (NRV) METHOD
The Estimated NRV method would generally be used instead of the Relative Sales Value at
Splitoff Point method only when a market price at the splitoff point is not available for one
or more of the joint products, for example because a product is not marketable at the
splitoff point. If a market price at the splitoff point is available for one or more of the joint
products because the products can be sold at that point, that price is used instead of the
products’ NRVs, even if the products will be processed further
PHYSICAL MEASURE
METHOD
Joint cost allocation may be done based on the weight, volume, or
other physical measure of the joint products. Joint costs are
allocated based on some common unit of measurement of output at
the splitoff point, such as pounds, tons, gallons, or board feet (for
lumber).
B. JOINT COST

[Link] Company processes 100 gallons of raw materials into 75 gallons of product GS-50 and 25
gallons GS-80. GS-50 is further processed into 50 gallons of products GS-505 at a cost of $5,000,
and GS-80 is processed into 50 gallons of GS-805 at a cost of $2,000. Exhibit below shows the
manufacturing flow.

The production process starts at point 1. A total of $20,000 in joint manufacturing costs are incurred
in reaching point 2. Point 2 is the split-off point of the process that manufactures GS-50 and GS-80.
At this point, GS-50 can be sold for $300 a gallon, and GS-80 can be sold for $60 a gallon. The
process is completed at point 3 – products GS-505 and GS-805 have a sales price of $500 a gallon
and $140 a gallon, respectively.

[Link] the joint product costs using each of the three methods: (A) physical measure, (B)
sales value at split-off point, and (C) net realizable value.
16
SOLUTION

17
Atlas Foods produces the following three supplemental food
products simultaneously through a refining process costing
$93,000. The joint products, Alfa and Betters, have a final selling
price of $4 per pound and $10 per pound, respectively, after
additional processing costs of $2 per pound of each product are
incurred after the split-off point.
• Alfa - 10,000 pounds of Alfa, a popular but relatively rare grain
supplement having a caloric value of 4,400 calories per
pound
• Betters - 5,000 pounds of Betters, a flavoring material high in
carbohydrates with a caloric value of 11,200 calories per pound
Assuming Atlas Foods inventories Morefeed, the by-product, the
joint cost to be allocated to Alfa, using the physical quantity
method is

Ans: Total of 15,000 pounds of Alfa and Betters. Of this, 2/3 is

Alfa and 1/3 is Betters. Therefore, Alfa will receive 2/3 of the
joint costs. The joint costs are $93,000, but because the by-
product is being inventoried, this needs to be reduced by the
$3,000 revenue from selling by-product. Therefore, there is a total
of $90,000 that needs to be allocated and 2/3 of this is $60,000.
Assuming Atlas Foods does not inventory Morefeed, the by-product,
the joint cost to be allocated to Betters using the net realizable value
method is

Ans: Net realizable value (NRV) is calculated as the selling price

minus future costs to complete and dispose. For Alfa, the NRV is $2
per pound ($4 selling price minus additional processing costs of $2),
or $20,000 in total. For Betters, the NRV is $8 per pound ($10
selling price minus $2 additional processing costs), or $40,000 in
total. Together, the total NRV of the two products is $60,000. Of
this, 1/3 is Alfa and 2/3 is Betters. Therefore, Betters will get 2/3 of
the joint allocable costs. The joint costs to allocate are the $93,000
and because they do not inventory the by-product, all $93,000 of the
joint costs need to be allocated. Betters is to receive 2/3 of this, or
$62,000.
Assuming Atlas Foods inventories Morefeed, the by-product, the
joint cost to be allocated to Alfa using the net realizable value
method is
Net realizable value (NRV) is calculated as the selling price minus
future costs to complete and dispose. For Alfa, the NRV is $2 per
pound ($4 selling price minus $2 additional processing cost), or
$20,000 in total. For Betters, the NRV is $8 per pound ($10 selling
price minus $2 additional processing cost), or $40,000 in total.
Together, the total NRV of the two products is $60,000. Of this, 1/3
is Alfa and 2/3 is Betters. Therefore, Alfa will get 1/3 of the joint
allocable costs. The joint costs to allocate are the $93,000 in joint
costs reduced by the $3,000 of revenue that will be received from
the sale of the by-product. (The process of inventorying the by-
product requires that the $3 per unit sales value is debited to
inventory and the corresponding credit is a reduction of the
production costs.) So, $90,000 needs to be allocated, and Alfa's 1/3
THANK YOU!