CHAPTER 13
PowerPoint Presentation by
LuAnn Bean
Allocating Costs
To Responsibility
Centers
Professor of Accounting
Florida Institute of Technology
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Managerial Accounting 11E
Maher/Stickney/Weil
☼
CHAPTER GOAL
Chapter 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.
☼
LO 1
DIRECT COST: Definition
Is one that firms can identify
specifically with, or trace
directly to a particular product,
department, or process.
LO 1
INDIRECT COST: Definition
Results from joint use of a
facility or service by several
products, departments, or
processes.
LO 1
MANAGERS WANT TO KNOW!
What are common costs?
Common costs are indirect
costs that cannot be
identified by a cost object.
LO 1
MANAGERS 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 2
SERVICE DEPARTMENT
Service 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
departments
User departments must be aware of what
costs their department must cover
User departments should not treat service
departments as if they are free
LO 3
COST ALLOCATION
The cost allocation process has three steps:
1) Assign direct costs to departments
2) Allocate indirect costs to departments
3) Allocate service department costs to
production departments
F
B
LO 3
EXAMPLE: First Bank
First 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.
Continued
LO 3
F
B
What department
would be
responsible for cost
allocation and
preparing
accounting
reports for
managerial use?
EXHIBIT 13.1
LO 3
F
B
Step 1:
Distribute
direct overhead
costs.
EXHIBIT 13.2
LO 3
F
B
Step 2:
Allocate
indirect
overhead
costs.
EXHIBIT 13.2
F
B
LO 3
ALLOCATION
First 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 3
F
B
Cost drivers for
First Bank’s
indirect costs.
Miscellaneous
costs will be
allocated
evenly.
EXHIBIT 13.4
LO 3
F
B
EXHIBIT 13.5
Example:
proportionate
allocation of
indirect costs
based on
department use
of indirect
costs.
LO 3
Allocation of
security costs to
four departments.
Cost driver: # of
security visits.
EXHIBIT 13.6
LO 3
Allocation of
property tax
costs to four
departments.
Cost driver: book
value of assets.
EXHIBIT 13.6
LO 3
Allocation of
rent and utilities
to four
departments.
Cost driver: floor
space.
EXHIBIT 13.6
LO 3
Step 3: Allocate service
department costs to production
departments.
EXHIBIT 13.2
LO 3
MANAGERS WANT TO KNOW!
How should service
department costs be
allocated?
Service department costs
should be allocated by one
of three methods: direct,
step, or reciprocal.
LO 3
SERVICE DEPARTMENT
ALLOCATIONS
Under 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 5
MARKETING and
ADMINISTRATIVE COSTS
Allocating 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 6
JOINT PROCESS: Definition
Simultaneously converts
common input into several
outputs.
Example: timber logs are processed into
lumber of various grades and sizes.
LO 6
SPLITOFF POINT: Definition
Is the stage of processing
when two products are
separated.
LO 6
The NRV method implies a matching of
input costs with revenues generated by
each output.
The physical quantities method is used when
output product prices are highly volatile
or when significant processing occurs
between split off and the 1st point
of marketability.
LO 7
ALLOCATING JOINT-PROCESS
COSTS
Organizations allocate joint costs for many
reasons:
Measuring performance
Determining and responding to regulatory
rate changes
Estimating casualty losses
Resolving contractual interests and
obligations
Financial and tax reporting
End of CHAPTER 13
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