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.
Discussion
Support Department and Joint Cost Allocation in the Context of an Automobile Repair
Shop
In the context of automobile repair shops, it is common to see auxiliary divisions such as
administration, maintenance, and quality control. According to Kumar and Rajeev (2016), the
support departments play an indirect role in the production of repair services. There are three
regularly employed approaches to the allocation of support department costs. They include
the following:
Direct Method: This approach involves the direct distribution of support department costs to
production departments, utilizing a specified allocation key. In the context of an automotive
repair facility, the direct allocation approach could be employed to distribute expenses by
considering the quantity of repairs carried out by individual production departments. One
such method for allocating administrative costs is to distribute them proportionally based on
the volume of repair projects managed by each department (Yukcu & Ozkaya, 2010).
Step-Down Method: The step-down system distributes the costs of one support group to the
other support groups and finally to the production groups. This technique could be used in an
automotive repair facility to divide up the price of routine maintenance between management
and manufacturing. Recognizing the interdependencies between support departments, this
approach yields more accurate results (Yukcu & Ozkaya, 2010; Deevski, 2019).
Reciprocal Method: The reciprocal method considers the mutual services provided by
support departments to one another. It calculates a set of simultaneous equations to allocate
costs. This method is more complex and may not be commonly used in a small automobile
repair shop (Togo, 2013).
Joint Cost Allocation for an Automobile Repair Shop:
In an automobile repair shop, joint costs may arise when multiple repair jobs are performed
together, resulting in shared costs. Four methods for allocating joint costs are:
Physical Units Method: The allocation of joint costs in this method is determined by the
quantity of physical units produced. In the context of an automotive repair facility, this would
include the allocation of joint expenditures in accordance with the quantity of vehicles fixed
together. This approach is characterized by its simplicity, yet its level of accuracy may be
subject to limitations (Javed, 2023).
Sales Value at Split-off Point Method: The allocation of joint costs in this method is
determined by the respective sales values of the various items (repair jobs) at the moment
they are separated. According to Rizqi et al. (2022), this method is used to distinguish
between repair projects of varying value.
Net Realizable Value Method: This method subtracts the anticipated costs of completing
and selling the products (repair jobs) from their estimated selling prices (after further
processing). It is suitable when some repair jobs require additional labor (CFI, 2018).
Constant Gross Margin Percentage NRV Method: The objective of this approach is to
ensure a uniform gross margin percentage across all goods (repair jobs) by modifying the
allocation of joint costs. The suitability of products is contingent upon the extent to which
they possess varied degrees of value addition (Tamplin, 2023).
Implications of Improving Operations in an Automobile Repair Shop:
Enhancing operational processes within an automobile repair shop yields significant
implications, notably enhanced efficiency and improved client satisfaction. According to
Kaydos (2020), the implementation of strategies such as streamlining repair processes,
reducing wait times, improving quality control, and optimizing the allocation of support
departments and joint costs can yield several benefits for the shop. These benefits include
enhancing profitability by minimizing wastage and reducing costs, attracting a larger
customer base through positive word-of-mouth and favorable reviews, establishing a loyal
customer following, boosting employee morale and retention, ensuring compliance with
regulatory standards, and gaining a competitive advantage in the market.
Conclusion
In summary, the accurate reporting of financial information and the making of informed
decisions heavily rely on the appropriate allocation of support department costs and joint
costs. The selection of allocation techniques is contingent upon the particular attributes of the
automotive repair shop and its operational processes. Through the strategic optimization of
operations and the efficient allocation of costs, the shop can effectively thrive within a
competitive market, all the while ensuring the provision of superior repair services to its
esteemed clientele.
References
CFI, (2018). Net Realizable
Value. https://corporatefinanceinstitute.com/resources/valuation/net-realizable-valuenrv/
Deevski, S. (2019). Management of indirect cost–mathematical methods for cost
allocation. Trakia Journal of Sciences, 17(1), 496-506. http://tru.unisz.bg/tsj/Volume%2017,%202019,%20Supplement%201,%20Series%20Social%20Sc
iences/3/za%20pe4at/80.pdf
Guajardo, M., & Rönnqvist, M. (2016). A review on cost allocation methods in collaborative
transportation. International transactions in operational research, 23(3), 371392. https://onlinelibrary.wiley.com/doi/abs/10.1111/itor.12205
Javed, R (2023). Quantitative or physical units method of joint cost
allocation. https://www.accountingformanagement.org/quantitative-unit-method-ofjoint-cost-allocation/
Kaydos, W. (2020). Operational performance measurement: increasing total
productivity. CRC press.
Kumar, D., & Rajeev, P. V. (2016). Value chain: a conceptual framework. International
journal of engineering and management sciences, 7(1), 7477. https://www.researchgate.net/profile/Dilip-Kumar12/publication/325110680_Value_Chain_A_Conceptual_Framework/links/5bb48d19
45851574f7f7789c/Value-Chain-A-Conceptual-Framework.pdf
Rizqi, M. N., Yudiana, Y., & Juliani, C. N. (2022). Collective Cost Calculation Analysis In
Determining The Cost Of Production Cv. Barokah. Jurnal HARMONI: Jurnal
Akuntansi dan Keuangan, 1(1), 9-16. https://ejournal.uikabogor.ac.id/index.php/JHARMONI/article/view/7206
Tamplin, T. (2023). Constant Gross-Margin Percentage NRV
Method. https://www.financestrategists.com/accounting/cost-accounting/joint-costallocation-methods/constant-gross-margin-percentage-nrvmethod/#:~:text=The%20Constant%20Gross%2DMargin%20Percentage%20NRV%2
0Method%20calculates%20prices%20by,the%20price%20of%20the%20item.
Togo, D. (2013). Reciprocal cost allocations for many support departments using spreadsheet
matrix functions. Journal of Accounting and Finance, 13(4), 5559. http://www.digitalcommons.www.nabusinesspress.com/JAF/TogoD_Web13_4_.pdf
Yukcu, S., & Ozkaya, H. (2010). Comparison of methods for allocation of service
departments’ costs to operating departments: A Monte Carlo simulation. African
Journal of Business Management, 4(5), 764769. https://www.academia.edu/download/66800078/article1380716636_Yukcu_and_
Ozkaya_pdf.pdf
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