Q – Please read the discussion below and prepare a reply to this discussion withcomments that further and advance the discussion topic.
Please provide the references you used.
Ensure zero plagiarism.
Word limit: 120 to 150 words.
Support Department and Joint Cost Allocation
Discussion
The selected business is an automobile repair shop, which offers repair services but
requires direct materials that help in the process. The business has an operational department
based on the type of service, such as engine servicing (Warren & William B.
Tayler, 2020). The support department includes customer service, which will be allocated to
the operating department. The allocation methods include the following: The direct method
allocates support department costs to the operating department without considering the
relationship between different departments. The method assumes that the costs are directly
proportional; thus, bases such as machine hours are applied in the allocation.
The second method is the step-down method, which considers the hierarchical order in
allocating support department costs to operating departments. The method allocates costs one
at a time, using different factors to ensure that the contribution of the operating department
forms the basis of the allocation (Garrison et al., 2016). The third method is the reciprocal
method, where allocation is based on the relationship between support department costs. The
method is the most difficult but accurate because it examines each cost before allocating it to
various operating departments. The organization could use the direct method in allocating
support department costs because it is easy since most automobile repair shows have few
resources to help track the interrelationship of the operating departments.
The methods for allocating joint costs include the following: The first is physical units,
which is the allocation of costs based on physical units such as the volume or weight of the
products. The method is unsuitable for automobile repair because it does not include physical
units such as weight (Hansen et al., 2021). The second method is sales value at the split, which
focuses on allocating costs based on sales volume at the split-off point. The method is usable
in the automobile repair shop if more than two departments have different values. The method
requires recording revenue based on departments to help allocate costs.
The third method is the estimated net realizable value method, which allocates costs
per department after selling the products after further processing. The method is commonly
used on products reprocessed after the initial finished product is completed. For example, the
method cannot be used in the shop unless the car is modified after overhauling the original
product. The last method is the constant gross margin percentage of the NRV. The method
allocates costs based on the assumption that all the departments in an organization should have
the same gross margin (Warren & William B. Tayler, 2020). The method cannot be used in the
automobile repair shop since the services offered per department are unique, with different
costs and revenues. The most common application method for the shop is the sales value splitoff method because of the bundling of services to clients. The most important application for
improving operations in the automobile shop is accurate pricing to attract more customers. The
correct pricing will ensure that each client gets value for their money.
References:
Garrison, R. H., Peter C. Brewer, P., & Noreen, E. (2016). Managerial accounting for
managers. McGraw-Hill Education.
Hansen, D. R., Mowen, M. M., & Heitger, D. L. (2021). Cost management. Cengage
Learning.
Warren, C. S., & William B. Tayler, C. (2020). Support Department and Joint Cost
Allocation. In Managerial accounting. Cengage Learning.
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