Chapter 17

Allocation of
Support Activity
Costs and Joint
Costs

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All

Learning
Objective
1

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All

Service Department Cost

Allocation
How are service
department costs
charged to production
departments?

First, we identify the factor

that drives costs in the
service department.
This cost driver is called
the allocation base.

Service Department Cost

Allocation
Service
Departments
Provide support
that facilitates the
activities of production
departments.

support

Production
Departments
Carry out the
central purposes
of an organization.

Service Department Cost

Allocation
Service
Department
(Cafeteria)
Service
Department
(Accounting)
Service
Department
(Personnel)

First Stage Allocations

Service department costs are allocated
to production departments.

Production
Department
(Machining)
Production
Department
(Assembly)

The
Product

Service Department Cost

Allocation
Service
Department
(Cafeteria)
Service
Department
(Accounting)
Service
Department
(Personnel)

Production
Department
(Machining)
Production
Department
(Assembly)

The
Product

Second Stage Allocations

Production department overhead costs, plus allocated service
department costs, are applied to products using
departmental predetermined overhead rates.

Selecting Allocation Bases

Personnel:
Number of
employees

Typical
Allocation
Bases

Receiving:
Units
handled
Security:
Square
footage

Custodial:
Square
footage
Cafeteria:
Number of
employees

Accounting:
Staff
hours

Power:
Kilowatt
hours

Interdepartmental Services
Service
Department
(Cafeteria)

Production
Department
(Machining)

POWER DEPARTMENT

Service
Department
(Custodial)

Production
Department
(Assembly)

Interdepartmental Services
Problem
Allocating costs when service departments
provide services to each other

Solutions
Direct Method
Step Method

Direct Method
Cost of services
between service
departments are
ignored and all
costs are
allocated directly
to production
departments.

Service
Department
(Cafeteria)

Production
Department
(Machining)

Service
Department
(Custodial)

Production
Department
(Assembly)

Step Method
Service department
costs are allocated
to other service
departments and
to production
departments, usually
starting with the
service department
that serves the
largest number of
other service
departments.

Service
Department
(Cafeteria)

Production
Department
(Machining)

Service
Department
(Custodial)

Production
Department
(Assembly)

Step Method
Once a service
departments costs
are allocated,
other service
departments costs
are not allocated
back to it.

Service
Department
(Cafeteria)

Production
Department
(Machining)

Service
Department
(Custodial)

Production
Department
(Assembly)

Step Method
Custodial will
have a new
total to allocate
to production
departments: its
own costs plus
those costs
allocated from
the cafeteria.

Service
Department
(Cafeteria)

Production
Department
(Machining)

Service
Department
(Custodial)

Production
Department
(Assembly)

Learning
Objective
2 (continued in
Textbook)

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All

Fixed Versus Variable Costs

Are fixed
and variable
costs allocated
differently?

Fixed Versus Variable Costs

Problem
Allocating common
fixed costs using a
variable activity
allocation base

Result
When one department
decreases activity to
reduce allocations, all
departments are penalized
because the charge
per use increases.
Remember, total fixed
costs do not change as
activity changes.

Fixed Versus Variable Costs

Problem
Allocating common
fixed costs using a
variable activity
allocation base

Solution
Use dual allocation
method, allocating
fixed and variable
costs separately.

Dual Cost Allocation

Variable
Costs

Fixed
Costs

Charge to
production
departments at a
budgeted rate times
actual short-run usage of
the allocation base.

Allocate
budgeted amounts
to operating departments
in proportion to the
long-run average
usage of the
allocation base.

Learning
Objective
3 6 can be
found in the
Textbook

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All

av
ai
la
bl
e
e
tim
W
ee
kly

52

17

Bi
M ol o
Fr ath gy
Ac en
co ch
un
t in
g

ho
ur
s

End of Chapter 17

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