Based on the attached file, I received this question.
Q-
I agree with your assessment that cost control one efficiency is important. More specifically, what might be a recommendation to improve efficiency and overall cost controls? Are there any methods that we learned about through our reading over the last couple of weeks that would help?
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Cost Allocation
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Support Department and Joint Cost Allocation for an Automobile Repair Shop
Cost allocation entails the identification, accumulation, and allocation of costs to
divisions or products of a company. This essay will discuss the allocation of support department
costs and joint costs for an automobile repair shop.
Allocation of Support Department Costs:
The main operational departments in an automobile repair shop are the engine repair,
bodywork, and painting. Nonetheless, there are support departments, such as those for
maintenance, customer service, and parts inventory. The methods of allocating support
department costs include:
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Direct Method:
This approach allocates costs from the support departments directly to the key operational
departments without taking into account inter-departmental support (Warren & Tayler, 2018).
For instance, if customer service in the auto repair shop exclusively provides support to engine
repair and bodywork, their costs would be directly allocated to those departments depending on
factors like labor hours or machine hours. The direct method may be the most appropriate in the
context of an auto repair shop because it is easy to implement. Moreover, support divisions like
parts inventories and customer service provide services directly to larger divisions.
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Step-Down Method:
This approach takes into account the hierarchical order in which support departments
provide services to other support departments. For example, if maintenance supports both
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customer service and engine repair, it would allocate costs first to customer service and then to
engine repair.
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Reciprocal Method:
This method acknowledges the relationship between service departments and assign
costs to and from each service department for the services rendered (Warren and Tayler, 2018).
For instance, the costs of customer service and maintenance would be split reciprocally if they
supported one another.
Allocation of Joint Costs:
Joint costs occur when the same resource yields two or more distinct goods at the same
time. For instance, in a scenario where a car overhaul includes both engine repair and bodywork
at a package price, there might be a need to allocate joint costs. The methods of allocating joint
product costs include:
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Physical Units method:
This approach allocates joint costs depending on outputs that can be measured physically,
including weight, volume, or units. Warren and Tayler (2018) assert that this is a simple and
objective approach, but it may not reflect the relative value or marketability of each product or
service. Therefore, this method is not very appropriate for an auto repair shop.
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Sales value at split-off method:
This method allocates joint costs based on the proportion of the sales value of the finished
products or services at the point they are separated from the shared process (Rizqi et al., 2022).
Sales value at split-off method could be utilized if engine repair and bodywork have distinct
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values. Thus, this approach may be the most applicable for an auto repair shop, particularly when
services are bundled.
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The Net Realizable Value Method:
Joint costs are assigned based on the estimated sales value of the finalized products. This
approach may be useful if the car needs additional improvements following the initial
refurbishment. This approach is less useful in the context of a car repair shop.
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Weighted Average Method:
This is an easy method that uses a weighted average formula to evenly distribute joint
costs among all goods and services.
Implication for Improving Operations:
The most important implication for improving operations in an automobile repair shop is
cost control and efficiency. An automobile repair shop may price services correctly and ensure
that each department is profitable by accurately allocating support department costs.
Additionally, it sheds light on which divisions are more cost intensive, aiding in the selection of
potential areas for efficiency improvements. The support departments’ ability to operate
efficiently and at the lowest possible cost boosts customer satisfaction and profitability.
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References
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://doi.org/10.32832/jharmoni.v1i1.7206
Warren, C. S., & Tayler, W. B. (2018). Managerial accounting. Cengage Learning.
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