Discuss the allocation of support department costs and joint costs for one of the following types of business: (a) TV assembler, (b) building contractor, (c) automobile repair shop, (d) paper manufacturer, (e) custom jewelry manufacturer? Discuss which of the three commonly used methods for allocating support department costs would or could be used and which of the four methods for allocating joint costs would or could be used in that business type and why. In the business type you selected, what is the most important implication improving operations in that business type?
Directions:
Chapter 5
Support
Department and
Joint Cost
Allocation
Learning Objectives (slide 1 of 2)
• Obj. 1: Describe support departments and support
department costs.
• Obj. 2: Describe the allocation of support
department costs using a single plantwide rate,
multiple department rates, and activity-based
costing.
• Obj. 3: Allocate support department costs to
production departments using the direct method,
sequential method, and reciprocal services method.
• Obj. 4: Describe joint products and joint costs.
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Learning Objectives (slide 2 of 2)
• Obj. 5: Allocate joint costs using the physical units,
weighted average, market value at split-off, and net
realizable value methods.
• Obj. 6: Describe and illustrate the use of support
department and joint cost allocations to evaluate the
performance of production managers.
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Support Departments (slide 1 of 3)
• A support department provides a necessary
service to produce a product, but is not directly
involved in the production process.
o For example, Janitorial and Maintenance departments
are necessary for production, but are not directly
involved in production.
• Support departments are sometimes called service
departments because they provide services to
other departments.
• Support departments are normally accounted for as
a cost or responsibility center. All direct costs of the
support department are accumulated in the center.
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Support Departments (slide 2 of 3)
• Because support department costs are only
indirectly related to production, they are difficult to
apply to products.
o However, it is difficult, if not impossible, to find an
appropriate cost driver for applying these costs to a
product.
• Some companies consider support department
costs to be facility-level costs and do not apply them
to products.
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Support Departments (slide 3 of 3)
o This approach ignores the fact that support
department services may be used more heavily by
some products than others, which can result in
inaccurate product costs.
▪ Hence, guidance for incorporating support department cost
allocation into a product costing system is provided in the
following slides.
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Allocation of Overhead Costs
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Single Plantwide Rate (slide 1 of 2)
• When a single plantwide overhead rate is used to
apply overhead to products, support department
costs are simply combined with all other overhead
costs.
o The total overhead cost is then applied to the
products using a single cost driver.
• Because a single driver is used for all overhead
costs, it is unlikely that the driver selected is
appropriate for every type of overhead.
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Single Plantwide Rate (slide 2 of 2)
o This method ignores the fact that the processes used
in manufacturing a product may differ from those
used for other products.
o As a result, using a single plantwide rate may result in
inaccurate product costs.
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Allocating Overhead Costs Using a Single
Plantwide Rate
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Multiple Production Department Rates
• When multiple production department rates are
used to apply overhead to products, overhead costs
are first directly traced or distributed to support and
production departments.
o Support department costs are then allocated to
production departments based on the amount of
support activity used by each production department.
o After support department costs are allocated to the
production departments, production department costs
are then applied to the products using cost drivers for
each production department.
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Allocating Overhead Costs Using Multiple
Production Department Rates
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Activity-Based Costing (slide 1 of 2)
• When activity-based costing (ABC) is used to apply
overhead to products, support department costs are
referred to as support activity costs.
o The process for allocating support activity costs is
similar to that used with multiple production
department rates.
▪ Overhead costs are directly traced or distributed to
support and production activities.
▪ Support activity costs are allocated to production
activities.
▪ Production activity costs are applied to the products
using cost drivers for each production activity.
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Allocating Overhead Costs Using ActivityBased Costing
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Activity-Based Costing (slide 2 of 2)
• The terms assign, distribute, apply, and allocate are
often used when referring to manufacturing costs
and the transfer of these costs to departments and
products.
o Transferring overhead costs to support and
production departments is referred to as distributing
overhead costs.
o Transferring costs to products is referred to as
applying costs to products or the application of costs.
o Allocating costs or cost allocation may be used in a
variety of ways.
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Allocating Support Department Costs
to Production Departments
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Steps of Support Department Cost Allocation
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The Direct Method
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Using the Direct Method – Decker Tables
(slide 1 of 6)
• Step 1 – The costs for each department are determined
by identifying costs that can be traced to a specific
department.
Department
costs
Janitorial
Department
Cafeteria
Department
Cutting
Department
Assembly
Department
$310,000
$169,000
$1,504,000
$680,000
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Using the Direct Method – Decker Tables
(slide 2 of 6)
• Step 2 – An appropriate cost driver is determined for
each support department.
o
The more square footage that needs to be the cleaned, the
higher the Janitorial costs.
Support Department
Cost Driver
Janitorial Department
Square footage to be serviced
Cafeteria Department
Number of employees
• Step 3 – The usage of the support department cost
drivers by each department is determined.
Janitorial
Department
Cafeteria
Department
Cutting
Department
Assembly
Department
Square feet
50
5,000
1,000
4,000
Number of employees
10
3
30
10
Cost Driver
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Using the Direct Method – Decker Tables
(slide 3 of 6)
• Step 4 – The percentage usage of support
department cost drivers by the production
departments is determined.
o Determining the percentage usage based on square
footage
1,000
Cutting Department:
= 20% of Janitorial Services
1,000 + 4,000
4,000
Assembly Department:
= 80% of Janitorial Services
1,000 + 4,000
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Using the Direct Method – Decker Tables
(slide 4 of 6)
o Determining the percentage based on the number of
employees
30
Cutting Department:
= 75% of Janitorial Services
30 + 10
10
Assembly Department:
= 25% of Cafeteria Services
30 + 10
• Step 5 – Support department costs are allocated
to the production departments by multiplying the
percentage usage of each production
department by the total support department
costs.
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Using the Direct Method – Decker Tables
(slide 5 of 6)
Department
Janitorial Department Costs
Cutting Department
$ 62,000 ($310,000 × 20%)
Assembly Department
248,000 ($310,000 × 80%)
Total
$310,000
• The Cafeteria costs of $126,750 are allocated
$161,250 to the Cutting Department and $42,250 to
the Assembly Department, as follows:
Department
Cafeteria Department Costs
Cutting Department
$126,750 ($169,000 × 75%)
Assembly Department
42,250 ($169,000 × 25%)
Total
$169,000
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Using the Direct Method – Decker Tables
(slide 6 of 6)
• The support department costs are added to any
costs that were directly traced or distributed to
the production departments in Step 1.
o Thus, the total costs of the Cutting and Assembly
departments are as follows:
Cutting Department
$1,504,000 (from Step 1) + $62,000 (from Step 5) + $126,750 (from Step 5) = $1,692,750
Assembly Department
$680,000 (from Step 1) + $248,000 (from Step 5) + 42,250 (from Step 5) = $970,250
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Summary of Support Department Cost
Allocations Using the Direct Method
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Check Up Corner
•
Direct Method of Support
Department Cost Allocation
Support Department 1 has $200,000 in costs distributed to it. Costs from Support
Department 1 will be allocated to other departments based on labor hours.
Support Department 2 uses 50 labor hours from Support Department 1,
Production Department 1 uses 75 labor hours from Support Department 1, and
Production Department 2 uses 25 labor hours from Support Department 1.
o
o
o
Using the direct method for support department cost allocation, how much of Support
Department 1’s costs will be allocated to Support Department 2?
Using the direct method for support department cost allocation, how much of Support
Department 1’s costs will be allocated to Production Department 1?
Using the direct method for support department cost allocation, how much of Support
Department 1’s costs will be allocated to Production Department 2?
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Check Up Corner
a.
b.
Direct Method of Support Department
Cost Allocation Solution (slide 1 of 2)
Because the direct method is used, all support department costs are allocated
directly to the production departments. None of Support Department 1’s costs
are allocated to Support Department 2.
Note that, because no costs are allocated from Support Department 1 to
Support Department 2, the number of Support Department 1 labor hours used
by Support Department 2 is irrelevant. Production Department 1 uses 75% of
Support Department 1’s labor hours (only considering the usage among
departments to which Support Department 1’s costs will be allocated),
computed as follows:
75
= 75%
75 + 25
o
Costs are allocated from Support Department 1 to Production Department 1 by
multiplying the $200,000 Support Department 1 costs by Production Department 1’s
proportional usage of Support Department 1 labor hours. Thus, allocated costs are
$200,000 × 75% = $150,000.
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Check Up Corner
•
Direct Method of Support Department
Cost Allocation Solution (slide 2 of 2)
Production Department 2 uses 25% of Support Department 1’s labor hours (only
considering the usage among departments to which Support Department 1’s costs
will be allocated), computed as follows:
25
= 25%
75 + 25
o
Costs are allocated from Support Department 1 to Production Department 2 by
multiplying the $200,000 Support Department 1 costs by Production Department 2’s
proportional usage of Support Department 1 labor hours. Thus, allocated costs are
$200,000 × 25% = $50,000.
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The Sequential Method or Step-Down Method
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The Sequential Method (slide 1 of 7)
• Under the sequential method, support department
costs are never allocated back to a support
department whose costs have already been
allocated.
o As a result, the sequential method captures some, but
not all, of the inter-support-department services.
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The Sequential Method – Allocation of Costs
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The Sequential Method (slide 2 of 7)
• There may be a conflict in the preceding factors.
o
For example, the support department with the highest costs may
serve the fewest number of other support departments.
o
As a result, managers often make subjective assessments about
the order of allocating support departments.
• Steps 1 to 3 of the sequential method are the same as
for the direct method.
Support Departments
Specifics
Production Departments
Janitorial
Cafeteria
Square feet
50
5,000
1,000
4,000
Number of employees
10
3
30
10
$310,000
$169,000
$1,504,000
$680,000
Department costs
Cutting Assembly
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The Sequential Method (slide 3 of 7)
• In Step 4, the proportional usage of each
support department’s cost driver by the other
departments to which its costs are to be
allocated is determined.
o Assume that Decker Tables decides to allocate
Janitorial costs first, followed by Cafeteria costs.
Janitorial Department Usage
Department
Square Feet
Usage Percent
Cafeteria
5,000
50%
Cutting
1,000
10
Assembly
4,000
40
Totals
10,000
100%
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Sequential Method (slide 4 of 7)
• The proportional usage of Cafeteria services by the
Cutting and Assembly departments is as follows:
Cafeteria Department Usage
Department
o
Square Feet
Usage Percent
Cafeteria
5,000
50%
Cutting
1,000
10
Assembly
4,000
40
Totals
10,000
100%
The usage of the Cafeteria Department by the Janitorial
Department is not considered.
▪ This is because the Cafeteria Department costs are allocated after
the Janitorial Department.
o
Once a support department’s costs are allocated under the sequential
method, it is not allocated any additional costs.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Sequential Method (slide 5 of 7)
• In Step 5, each support department’s costs are
allocated to other departments.
o The support department’s total costs are multiplied by
the proportional usage of the departments to which
costs are allocated.
• Under the sequential method, the total support
department costs to be allocated will also include
any costs that were allocated to that support
department from other support departments.
o This is a major difference between the sequential
method and the direct method.
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The Sequential Method (slide 6 of 7)
• To illustrate, the Janitorial Department’s costs of
$310,000 are allocated to the Cafeteria, Cutting, and
Assembly departments by multiplying $310,000 by
each department’s proportional usage, as follows:
Department
Janitorial Department
Costs ($)
×
Cafeteria
Department
$310,000 ×
Cutting
Department
310,000
Assembly
Department
310,000
Totals
×
×
Usage
Allocated
=
Percent (%)
Cost ($)
50% =
$155,000
10
=
31,000
40
=
124,000
100%
$310,000
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The Sequential Method (slide 7 of 7)
• The total Cafeteria Department costs of $324,000
($169,000 + $155,000) are allocated to the Cutting
and Assembly departments as follows:
Department
Cafeteria Department
Costs ($)
×
Cutting
Department
$324,000 ×
Assembly
Department
324,000
Totals
×
Usage
Allocated
=
Percent (%)
Cost ($)
75% =
25
100%
=
$243,000
81,000
$324,000
• The support department cost allocations using the
sequential method for Decker Tables are
summarized in the next slide.
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Summary of Support Department Cost
Allocations Using the Sequential Method
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Check Up Corner
•
Sequential Method of Support
Department Cost Allocation (slide 1 of 2)
Jupiter Enterprises LLC has two support departments and two production
departments. Support Department 1 has $500,000 in costs distributed to it. Costs
from Support Department 1 will be allocated to other departments based on
machine hours. Support Department 2 has $250,000 in costs distributed to it.
Costs from Support Department 2 will be allocated to other departments based on
square feet. Production Departments 1 and 2 have $1,000,000 and $1,200,000 in
costs distributed to them, respectively. Costs are allocated using the sequential
method, allocating Support Department 1 costs first.
o
Departmental usage of cost drivers is summarized as follows:
Specifics
Support
Department 1
Support
Department 2
Production
Department 1
Production
Department 2
Machines hours
200
1,000
10,000
14,000
Square feet
800
650
1,000
4,000
$500,000
$250,000
$1,000,000
$1,200,000
Department cost
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Check Up Corner
a.
b.
c.
d.
e.
Sequential Method of Support
Department Cost Allocation (slide 2 of 2)
How much of Support Department 1’s costs will be allocated to Support Department 2?
How much of Support Department 1’s costs will be allocated to Production Department 1?
How much of Support Department 1’s costs will be allocated to Production Department 2?
How much of Support Department 2’s costs will be allocated to Production Department 1?
How much of Support Department 2’s costs will be allocated to Production Department 2?
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Check Up Corner
Sequential Method of Support Department
Cost Allocation Solution (slide 1 of 5)
a. Support Department 2 uses 4% of Support Department 1’s machine hours,
computed as follows:
1, 000
= 4%
1, 000 + 10, 000 + 14, 000
o
Costs are allocated from Support Department 1 to Support Department 2 by multiplying
the $500,000 Support Department 1 costs by Support Department 2’s proportional
usage of Support Department 1’s machine hours. Thus, allocated costs are $500,000 ×
4% = $20,000.
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Check Up Corner
Sequential Method of Support Department
Cost Allocation Solution (slide 2 of 5)
b. Production Department 1 uses 40% of Support Department 1’s machine hours,
computed as follows:
10, 000
= 40%
1, 000 + 10, 000 + 14, 000
o
Costs are allocated from Support Department 1 to Production Department 1 by
multiplying the $500,000 Support Department 1 costs by Production Department 1’s
proportional usage of Support Department 1’s machine hours. Thus, allocated costs are
$500,000 × 40% = $200,000.
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Check Up Corner
Sequential Method of Support Department
Cost Allocation Solution (slide 3 of 5)
c. Production Department 2 uses 56% of Support Department 1’s machine hours,
computed as follows:
14, 000
= 56%
1, 000 + 10, 000 + 14, 000
o
Costs are allocated from Support Department 1 to Production Department 2 by
multiplying the $500,000 Support Department 1 costs by Production Department 2’s
proportional usage of Support Department 1’s machine hours. Thus, allocated costs are
$500,000 × 56% = $280,000.
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Check Up Corner
Sequential Method of Support Department
Cost Allocation Solution (slide 4 of 5)
d. Production Department 1 uses 20% of Support Department 2’s driver (square
feet), computed as follows:
1, 000
= 20%
1, 000 + 4, 000
o
o
Costs to be allocated from Support Department 2 equal $270,000, determined by
adding the costs originally distributed to Support Department 2 ($250,000) to the costs
allocated to Support Department 2 from Support Department 1 ($20,000) in part a.
Costs are allocated from Support Department 2 to Production Department 1 by
multiplying the $270,000 Support Department 2 costs by Production Department 1’s
proportional usage of Support Department 2’s driver (square feet). Thus, allocated costs
are $270,000 × 20% = $54,000.
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Check Up Corner
Sequential Method of Support Department
Cost Allocation Solution (slide 5 of 5)
e. Production Department 2 uses 80% of Support Department 2’s driver (square
feet), computed as follows:
4, 000
= 80%
1, 000 + 4, 000
o
Costs are allocated from Support Department 2 to Production Department 2 by
multiplying the $270,000 Support Department 2 costs by Production Department 2’s
proportional usage of Support Department 2’s driver (square feet). Thus, allocated costs
are $270,000 × 80% = $216,000.
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The Reciprocal Services Method
(slide 1 of 10)
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The Reciprocal Services Method
(slide 2 of 10)
• Steps 1 to 3 of the reciprocal method are the same
as for the direct and sequential methods.
Specifics
Janitorial
Cafeteria
Square feet
50
5,000
1,000
4,000
Number of
employees
10
3
30
10
$310,000
$169,000
$1,504,000
$680,000
Department cost
Cutting
Assembly
• Support departments never allocate their own costs
to themselves.
o The two cells shaded in the table are not needed.
▪ These drivers represent services the support departments
used within their departments.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Reciprocal Services Method
(slide 3 of 10)
• In Step 4, the proportional usage of each support
department’s cost driver by the other departments to
which its costs are to be allocated is determined.
• The proportional usages of Janitorial services are
the same as those indicated with the sequential
method.
Janitorial Department Usage
Square
Feet
Usage
Percent
Cafeteria
5,000
50%
Cutting
1,000
Assembly
Totals
Department
Cafeteria Department Usage
Number of
employees
Usage
Percent
Janitorial
10
20%
10
Cutting
30
60
4,000
40
Assembly
10
20
10,000
100%
Totals
50
100%
Department
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Reciprocal Services Method
(slide 4 of 10)
• In Step 5, support department costs are allocated
simultaneously among the departments.
o
This is done by using multiple algebraic equations with
variables for unknown quantities.
o
To illustrate, costs are allocated from Janitorial to
Cafeteria, Cutting, and Assembly by multiplying the total
Janitorial costs by the proportional usage of the other
departments.
o
The total Janitorial costs, however, include an unknown
amount for costs related to its employees’ use of the
cafeteria.
▪ Thus, the total of the Janitorial costs is expressed by the
unknown, J.
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The Reciprocal Services Method
(slide 5 of 10)
• Costs are allocated from Cafeteria to Janitorial,
Cutting, and Assembly by multiplying the total
Cafeteria costs by the proportional usage of the
other departments.
o But again, the total Cafeteria costs will include an
unknown amount for costs related to the Cafeteria
Department’s use of the Janitorial Department’s
services.
o Thus, the total of the Cafeteria costs is expressed by
the unknown, C.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Reciprocal Services Method
(slide 6 of 10)
• The total costs of the Janitorial Department will
include 20% of the Cafeteria Department’s
costs, which is the percent usage of the cafeteria
by the Janitorial Department.
J = $310,000 + (0.20 C)
• The total costs of the Cafeteria Department will
include 50% of the Janitorial Department’s costs,
which is the percent usage of Janitorial services
by the Cafeteria Department.
C = $169,000 + (0.50 J)
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Reciprocal Services Method
(slide 7 of 10)
• The preceding yields two equations with two
unknowns, as follows:
Equation 1: J = $310,000 + (0.20 C)
Equation 2: C = $169,000 + (0.50 J)
• Equation 2 can be rewritten in terms of J.
C = $169,000 + (0.50 J)
C – $169,000 = 0.50 J
C – $169, 000
= J
0.50
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Reciprocal Services Method
(slide 8 of 10)
• J in Equation 1 can then be replaced, resulting
in the following equation:
Equation 3:
C – $169,000
= $310,000 + (0.20 C)
0.50
• Solving Equation 3 for C yields the following:
C – $169,000
= $310,000 + (0.20 C)
0.50
C – $169,000 = (0.50 $310,000) + (0.50 0.20 C)
C = $169,000 + (0.50 $310,000) + (0.50 0.20 C)
C = $169,000 + $155,000 + (0.10 C)
C – (0.10 C) = $169,000 + $155,000
0.90 C = $324,000
$324,000
C=
0.90
C = $360,000
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Reciprocal Services Method
(slide 9 of 10)
• Adding the value of C to Equation 1 results in
the following:
J = $310,000 + (0.20 C)
= $310,000 + (0.20 $360,000)
= $310,000 + $72,000
= $382,000
• The total Janitorial Department cost and the total
Cafeteria Department cost can now be allocated
to the other departments based on the
percentage usages, as shown in the next slide.
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The Reciprocal Services Method
(slide 10 of 10)
Departments
Janitorial
Department
Costs ($)
Usage
Allocated
× Percent =
Cost($)
(%)
Cafeteria Department
382,000 ×
50 =
191,000
Cutting Department
382,000 ×
10 =
38,000
Assembly Department
382,000 ×
40 =
152,000
100
382,000
Totals
Departments
Cafeteria
Department
Costs ($)
Usage
Allocated
× Percent =
Cost($)
(%)
Janitorial Department
360,000 ×
20 =
72,000
Cutting Department
360,000 ×
60 =
216,000
Assembly Department
360,000 ×
20 =
72,000
100
360,000
Totals
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Summary of Support Department Cost Allocations
Using the Reciprocal Services Method
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Check Up Corner
•
Reciprocal Services Method
of Support Department Cost Allocation
Maeser Productions, a film production company, allocates support activity costs to
production activities using the reciprocal services method. Specifically, the costs
from two support activities, security and meals, are allocated to the production
activities of filming and makeup. Costs distributed to each department are
provided in the following table, as are driver levels for each of the two support
activities. Note that the security costs will be allocated based on asset value, and
meal costs will be allocated based on headcount.
Specifics
Security
Meals
Filming
Makeup
Asset value
$8,000
$100,000
$850,000
$10,000
Headcount
10
5
25
15
$250,000
$465,000
$750,000
$67,000
Department cost
a.
b.
What is the total cost to be allocated from Meals to the other three departments after
all support department cost allocations are made?
What is the total cost to be allocated from Security to the other three departments
after all support department cost allocations are made?
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Check Up Corner
a.
Reciprocal Services Method of Support
Department Cost Allocation Solution (slide 1 of 3)
Let X = the total cost to be allocated from Security, and let Y = the total cost to
be allocated from Meals.
o
o
o
o
The total costs of the Security Department will include 10 ÷ (10 + 25 + 15) = 20% of the
meals costs.
The total costs of the Meals Department will include $100,000 ÷ ($100,000 + $850,000 +
$50,000) = 10% of the security costs.
Thus,
▪ Equation 1: X = $250,000 + (0.20 × Y)
▪ Equation 2: Y = $465,000 + (0.10 × X)
Equation 2 can be rewritten in terms of X, as follows:
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Check Up Corner
Reciprocal Services Method of Support
Department Cost Allocation Solution (slide 2 of 3)
o
Next, replace the X in Equation 1 with
The resulting equation is:
o
Solving this equation for Y yields the following:
o
since this value equals X.
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Check Up Corner
o
Reciprocal Services Method of Support
Department Cost Allocation Solution (slide 3 of 3)
Now that Y is known, it can be plugged into Equation 1 to find X, as follows:
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Comparison of Support Department Cost
Allocation Methods
• The total costs allocated to the Cutting and
Assembly departments are different depending on
which of the three support department allocation
methods is used, as shown in the next slide.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Comparison of Direct, Sequential, and
Reciprocal Services Methods
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Joint Costs
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Allocating Joint Costs
Physical units method
Weighted average method
Market value at split-off method
Net realizable value method
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Physical Units Method (slide 1 of 3)
• The physical units method allocates joint costs using a
physical measure of the products at the split-off point,
such as pounds, gallons, or inches.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Physical Units Method (slide 2 of 3)
• The joint costs per batch of mud are as follows:
Specifics
Amount ($)
Direct materials
17,750
Direct labor
2,300
Overhead
213,790
Total costs
233,840
• Assume that at the split-off point, there are the
following quantities of products:
Specifics
Quantity (pounds)
Skin cream
200
Shampoo
150
Soap
150
Total
500
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Physical Units Method (slide 3 of 3)
• Using the physical units method, the total joint
costs of $233,840 are allocated using the
pounds of products at the split-off point.
Product
Split-Off
Quantity
(pounds)
Percent
at
Split-Off
× Joint Cost =
Joint Cost
Allocation
Skin cream
200
40 ×
$233,840 =
$ 93,536
Shampoo
150
30 ×
233,840 =
70,152
Soap
150
30 ×
233,840 =
70,152
500
100
Totals
$233,840
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Weighted Average Method (slide 1 of 3)
• The weighted average method allocates joint costs
based on weight factors for each product.
o The weight factors are multiplied by physical units to
arrive at weighted physical units.
o These weighted physical units are then used to
allocate the joint costs to the products.
o The weight factors can be based on a variety of
factors, such as the type of labor needed for each
product, the difficulty of producing each product,
and the estimated wear and tear on machines
caused by each product.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Weighted Average Method (slide 2 of 3)
• Assume that Davis Pharmaceuticals allocates joint
costs based on the mixing times of each product.
o The mixing speed for shampoo is three times that of
cream and soap.
o Thus, management applies a weighting factor of 3 to
shampoo and a weighting factor of 1 to skin cream
and soap.
▪ The weighted pounds for shampoo is 450 pounds.
▪ The weighted pounds for skin cream is 200 pounds.
▪ The weighted pounds for soap is 150 pounds.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Weighted Average Method (slide 3 of 3)
• The joint cost allocations for all three products
are shown below.
Split-Off
Quantity
(pounds)
Mixing
Time
Weight
Factor
Weighted
Pounds of
Mixing Time
(pounds)
Weighted
Percent of
Mixing Time
(%)
×
Joint
Cost ($)
=
Joint Cost
Allocation
($)
Skin
cream
200
1
200
25.00
×
$233,840 =
$ 58,460
Shampoo
150
3
450
56.25
×
233,840 =
131,535
Soap
150
1
150
18.75
×
233,840 =
43,845
500
5
800
100.00
Product
Totals
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
$233,840
The Market Value at Split-Off Method
(slide 1 of 3)
• The market value at split-off method allocates
joint costs using each product’s total market value at
the split-off point.
o Products that have a higher market value are
allocated more joint costs.
• To use the market value at split-off method, an
estimate of the market value at split-off must be
available.
• If a product is sold at the split-off point, its actual
sales price is used.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Market Value at Split-Off Method
(slide 2 of 3)
• Assume that Davis Pharmaceuticals can sell
skin care cream and shampoo at the split-off
point.
o At split-off point, skin care cream and shampoo sell
for $540 per pound and $480 per pound, respectively.
▪ Though soap requires additional processing to be sold,
management estimates a market value of $400 per pound for
soap at the split-off point.
Skin cream ($540 × 200 pounds)
$108,000
Skin cream ($480 × 150 pounds)
72,000
Soap
60,000
($400 × 150 pounds)
Total market value
$240,000
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Market Value at Split-Off Method
(slide 3 of 3)
• Using the market value at split-off method, the
joint cost allocations for all three products are
shown below.
Product
Estimated
Selling
Total
Split-Off
Price
Market Value
Quantity ×
=
per Pound
at Split-Off
(pounds)
at
($)
Split-Off ($)
Percent of
Total
Market
Joint Cost
Joint Cost
×
=
Value at
($)
Allocation ($)
Split-Off
(%)
Skin
cream
200
×
$ 540
=
$108,000
45
×
233,840
=
$105,228
Shampoo
150
×
480
=
72,000
30
×
233,840
=
70,152
Soap
150
×
400
=
60,000
25
×
233,840
=
58,460
500
×
$1,420
$240,000
100
Totals
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
$233,840
The Net Realizable Value Method
(slide 1 of 5)
• The net realizable value method allocates joint costs
using each product’s estimated net realizable value after
it is fully processed.
o
Products that have a higher net realizable value are
allocated more joint costs.
• Products that have a higher net realizable value are
allocated more joint costs.
• Some products can be sold at the split-off point or be
processed further and sold for a higher price.
o
Net realizable value is the estimated selling price of a
product less any costs necessary to further process the
product beyond the split-off point.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Net Realizable Value Method
(slide 2 of 5)
• For products processed beyond the split-off
point, net realizable value is computed as
follows:
Net Realizable Value = (Final Selling Price × Quantity) – Additional Processing Costs
• For products not processed beyond the split-off
point, the net realizable value is computed as
follows:
Net Realizable Value = Selling Price at Split-Off Quantity
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Net Realizable Value Method
(slide 3 of 5)
• To illustrate, assume the following for Davis
Pharmaceuticals’ three products:
Selling Price at
Split-Off Point ($)
Additional
Processing
Costs ($)
Selling Price
after
Further
Processing ($)
Skin cream
540
2,000 per batch
730
Shampoo
420
4,000 per batch
425
Soap
None
6,000 per batch
520
Products
• Davis Pharmaceuticals must decide which
products to process further and which to sell at
split-off.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Net Realizable Values at Split-Off and After
Further Processing
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Net Realizable Value Method
(slide 4 of 5)
• Given the preceding decisions on further
processing, the percentages of total net
realizable value of the three products are as
follows:
Product
Net Realizable Value ($)
Skin cream
$144,000
50%
Shampoo
72,000
25
Soap
72,000
25
$288,000
100%
Totals
Percent of Total Net Realizable Value (%)
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Net Realizable Value Method
(slide 5 of 5)
• Using the net realizable value method, the joint
costs of $233,840 are allocated as follows:
Product
Percent of Total
Net Realizable
Value (%)
Skin cream
50%
Shampoo
25
Soap
25
Totals
100%
×
Joint
Cost ($)
=
×
233,840
=
$116,920
233,840
=
58,460
233,840
=
58,460
×
×
Joint Cost Allocation ($)
$233,840
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Comparison of Joint Cost Allocations with Physical
Units, Weighted Average, Market Value at Split-Off, and
Net Realizable Values at Split-Off Methods
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Comparison of Joint Cost Allocation Methods
(slide 1 of 2)
• None of the four methods is more accurate than any
other method because they all allocate costs that
are, by definition, inseparable.
o Thus, a subjective determination must be made as to
the most appropriate method to use.
▪ The physical units method is the easiest to use and
allocates more costs to skin cream than to shampoo
and soap because more pounds of skin cream were
produced in the joint process.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Comparison of Joint Cost Allocation Methods
(slide 2 of 2)
• If management wants joint cost allocations to reflect
the difficulty with which products are made, the
weighted average method is most appropriate.
o If management wants joint cost allocations to reflect
the final market value of products, the net realizable
value method is ideal.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Check Up Corner
•
Joint Cost Allocation
Guybrush Enterprises produces two types of particle board: high and low density.
Both types of wood go through a joint production process where wood chips are
milled and mixed with resin, wax, water, and glue. The joint process costs a total
of $150 per batch. After the split-off point, high-density wood goes through an
additional compression process, whereas low-density wood is immediately sold
for $2 per square foot. One batch produces 200 square feet of low-density wood
and 120 square feet of high-density wood. The additional processing of the highdensity wood costs $135 per batch, and the high-density wood is then sold for $3
per square foot.
a.
b.
c.
Determine the joint production cost to be allocated to the low- and high-density wood
using the physical units method.
Determine the joint production cost to be allocated to the low- and high-density wood
using the net realizable value method.
Which method provides more accurate costing of the low- and high-density wood?
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Check Up Corner
Joint Cost Allocation
Solution (slide 1 of 3)
a. The total joint costs of $150 are allocated to each of the two types of wood
proportionally, based on the feet of wood produced in the joint production
process. Because there are 320 feet of wood total (200 + 120), low density
receives 62.5% (200 ÷ 320) of the $150 cost, or $94 (62.5% × $150). High density
receives 37.5% (120 ÷ 320) of the $150 cost, or $56 (37.5% × $150). The joint cost
allocations are summarized in the following table:
Joint Product
Square Feet
Low-density wood
200
62.5%
$ 94
High-density wood
120
37.5%
56
Totals
320
Proportion
Allocation
$150
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Check Up Corner
Joint Cost Allocation
Solution (slide 2 of 3)
b. Because high-density wood requires additional processing, the net realizable value
for high-density wood will be computed as the total revenue for high-density
wood minus the additional processing costs for high-density wood.
o
o
o
The net realizable value for the 200 feet of low-density wood that comes out of the joint
production process is $400 (200 × $2), since there are no additional processing costs for
low-density wood and low-density wood sells for $2 per square foot.
Because the 120 feet of high-density wood that comes out of the joint production
process sells for $3 per foot but requires an additional $135 per batch to process, the
net realizable value for high-density wood is $225 [(120 × $3) − $135].
Thus, the total net realizable value is $625 ($400 + $225). Low-density wood receives
64% ($400 ÷ $625) of the $150 cost, or $96 (64% × $150). High-density wood receives
36% ($225 ÷ $625) of the $150 cost, or $54 (36% × $150). The joint cost allocations are
summarized in following table.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Check Up Corner
Joint
Product
Joint Cost Allocation
Solution (slide 3 of 3)
Net
Realizable
Value
Proportion
Allocation
0
$400
64%
$ 96
135
225
36%
54
Feet
Market
Price
Market
Value
Added
Cost
Low-density
wood
200
$2
$400
$
High-density
wood
120
3
360
Totals
320
$625
$150
c. While the net realizable value method may be intuitively more satisfying because
the product line that generates more revenue carries a greater share of the joint
costs, neither method is more accurate. Joint costs are, by definition, inseparable,
so any separation is based on inaccurate assumptions. However, allocating joint
costs to joint products can still be useful for decision making, performance
measurement, and external reporting.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
By-Products (slide 1 of 2)
• By-products are goods of low value that are
produced from a joint production process.
• Because of their low value, it is not worth the effort
to develop separate product costs for by-products.
o Instead, the revenues from by-products are often
used to offset the cost of the joint production process.
o Alternatively, the sale of by-products is sometimes
reported as other revenue on the income statement
with no related cost of goods sold.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
By-Products (slide 2 of 2)
• Assume that an early step in the joint production of
skin cream, shampoo, and soap for Davis
Pharmaceuticals is the removal of small amounts of
mercury from the mud.
o Rather than incur the costs of further processing the
mercury or disposing of the mercury in an
environmentally safe manner, Davis Pharmaceuticals
sells it to Knight Manufacturing.
o Each batch produces $320 worth of mercury by-
product.
▪ Davis Pharmaceuticals subtracts the $320 of mercury
revenues from the joint production overhead costs.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Analysis for Decision Making (slide 1 of 5)
• Allocating support department costs and joint costs
has important implications for product costing.
o Some product costs are easy to identify and trace
directly to the products
▪ For example, it is easy to identify and trace direct
materials in a product that is not a joint product, or to
identify and trace direct materials for a joint product
after the split-off point.
• Production employee performance is often
evaluated based on product costs.
o For example, production manager bonuses may be
tied to decreasing product costs.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Analysis for Decision Making (slide 2 of 5)
• Consider the performance report of three
general managers who oversee three separate
chemical lines.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Analysis for Decision Making (slide 3 of 5)
• All GMs were over their cost targets. Ranking the
managers based on total costs:
o McKenna performed closest to her targets, over by
$42,350, followed by Jenn, over by $123,600, and
Jeff, over by $148,700.
o Thus, the company president may believe that
McKenna is the strongest GM of the group
• However, closer examination reveals a more
complex story.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Analysis for Decision Making (slide 4 of 5)
• McKenna missed her target primarily because her
direct materials costs were too high.
o This could be because of wasted materials in the
production process or some other cause.
• Jeff missed his performance target primarily
because of a higher-than-expected allocation of
support costs.
o This could be due to overuse of support activities.
▪ But since these costs are allocated based on square
feet and number of employees, Jeff may not be
responsible for the higher costs.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Analysis for Decision Making (slide 5 of 5)
• Jenn missed her performance target primarily
because of the allocation of joint product costs.
o These costs are allocated based on the net realizable
value of the chemical produced, Drison.
▪ Drison generates significantly higher margins than the
other two lines.
▪ As a result, Jenn’s product line received a much higher
allocation of joint costs.
▪ Jenn, however, has no oversight over the joint
production process, and is not responsible for the
higher costs.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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