Q – Read the discussion attached and prepare a Reply to this discussion post with comments that further and advance the discussion topic.
Hi, please.
Q – Read the discussion below and prepare a Reply to this discussion post with comments
that further and advance the discussion topic.
Please provide the references you used.
Ensure zero plagiarism.
Word limit: 50 to 70 words please do not exceed the limit.
Allocation of Support Department Costs and Joint Costs in an Automobile Repair Shop
The allocation of support department costs and joint costs is a crucial aspect of financial
management in any business. It helps in determining the true cost of production and aids in making
informed decisions regarding resource allocation (Alvian Sesa et al., 2023).
In an automobile repair shop, the three commonly used methods for allocating support department
costs are the direct method, the step-down method, and the reciprocal method. The direct method
allocates support department costs directly to the production departments without considering any
interdepartmental services. This method is relatively simple and easy to implement (Hussein & Togo,
2017). However, it may not accurately reflect the actual usage of support services by the production
departments.
The step-down method, on the other hand, considers the interdepartmental services by allocating
support department costs in a sequential manner. It starts with the department that provides the
most services to other departments and gradually allocates costs to other departments based on
their usage. This method provides a more accurate allocation of support department costs but can
be time-consuming and complex to implement (Hussein & Togo, 2017).
The reciprocal method takes into account the mutual services provided by support departments to
each other. It involves solving a set of simultaneous equations to determine the true cost of support
services. This method provides the most accurate allocation of support department costs but
requires advanced mathematical techniques and may be impractical for small businesses(Lowenthal
& Malek, 2013).
In terms of allocating joint costs in an automobile repair shop, the four commonly used methods are
the physical units method, the sales value at split-off method, the net realizable value method, and
the constant gross margin percentage method. The physical units method allocates joint costs based
on the physical quantity of each product (Lowenthal & Malek, 2013). This method is simple to
implement but does not consider the value or profitability of each product.
The sales value at split-off method allocates joint costs based on the relative sales value of each
product at the split-off point. This method considers the market value of each product but may not
accurately reflect the profitability of each product. The net realizable value method allocates joint
costs based on the estimated net realizable value of each product. This method provides a more
accurate allocation of joint costs but requires reliable estimates of the net realizable value (Papaj,
2017).
The constant gross margin percentage method allocates joint costs based on the expected gross
margin percentage of each product. This method considers both the sales value and the profitability
of each product(Papaj, 2017). However, it requires accurate estimates of the gross margin
percentage and may be complex to implement.
In an automobile repair shop, the most important implication of improving operations is enhancing
customer satisfaction and loyalty. This can be achieved by providing high-quality repairs, efficient
service, and competitive pricing. By allocating support department costs accurately, the shop can
determine the true cost of repairs and make informed decisions regarding pricing and resource
allocation (Alvian Sesa et al., 2023). Similarly, by allocating joint costs effectively, the shop can
identify the profitability of different repair services and focus on those that generate the highest
returns (Alvian Sesa et al., 2023).
References:
Alvian Sesa, G., Linata, A. P., & Tenrijaya, A. (2023). Allocation of Support Department Costs, Shared
Costs, and Revenue On Batik. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.4333705
Hussein, & Togo. (2017). Al-Jo’anee Company: support department cost allocations with matrices to
improve decision making. Tikrit Journal of Administration and Economics Sciences, 13(37), 287–298.
Lowenthal, F., & Malek, M. (2013). Cost allocation for outside sources replacing service departments.
Applied Mathematical Sciences, 7, 1263–1273. https://doi.org/10.12988/ams.2013.13117
Papaj, E. (2017, September 23). Reciprocal Allocation Method in Service Departments. The Case of a
Production Enterprise. Management Systems in Production Engineering, 25(4), 273–277.
https://doi.org/10.1515/mspe-2017-0040
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