Chapter 7

1) Describe the difference between support departments and producing departments.

Allocation is a means of dividing a pool of cost. Allocation does not affect the amount of total costs.
1. Departmentalize the firm and classify each department as a support/producing.
a. Producing departments are directly responsible for creating the products Examples:Assembly, Finishing
b. Support departments provide support services for producing. Examples:Maintenance, Human
Resources, cafeteria
2. Trace overhead to department. - to one, and only one.
3. Allocate support costs to producing.
4. Calculate predetermined overhead rates for producing.
5. Allocate overhead costs to the units of individual product through the predetermined overhead rates.
B. Types of Allocation Bases
Causal factors are variables or activities within a producing department that provoke the incurrence of support
costs.
Objectives associated with the allocation of support department costs to producing departments: To obtain a
mutually agreeable price, To compute product-line profitability, To predict the economic effects of planning and
control, To value inventory, To motivate managers
2)+Calculate charging rates, and distinguish between single and dual charging rates.
A. A Single Charging Rate- fixed/variable costs are combined. The use of a single rate treats the fixed cost as if it were
variable.
B. Dual Charging Rates- Two separate rates, one for fixed cost and one for variable cost.
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The benefits of dual charging rates include the following:
Fixed costs are allocated to producing according to their needs of support capacity.
Variable costs are allocated to producing based on their usage of the support service.
C.

Budgeted versus Actual Usage

1. Use the budgeted usage as the allocation base when fixed costs are involved.
2. Allocation of budgeted support service costs is better than allocation of actual support service costs because
allocating actual costs passes on the efficiencies or inefficiencies of the service department
3) +++Allocate support center costs to producing departments using the direct method, the sequential method.
A. Direct Method of Allocation- When support department costs are allocated only to the producing departments
B. Sequential Method of Allocation- recognizes that interactions among support departments do occur.
a. The costs of the support department rendering the greatest service are allocated first.
2. It recognizes some interactions among the support departments. Does not recognize all of the interactions between
support departments.
4.) Calculate departmental overhead rates
Upon allocating all support costs to producing departments, an overhead rate can be computed for each producing department.
Departmental overhead rates =
Direct overhead costs of producing department+Allocated costs of support department(est overhead for department)
Budgeted activity base producing
The accuracy of the product costs depends primarily on the accuracy of the assignment of the overhead costs because
material and labor are directly traceable to products.
5.) Identify the characteristics of the joint production process, and allocate joint costs to products.
Joint products are two or more products produced simultaneously by the same process up to a split-off point.
Separable costs are easily traced to individual products and offer no particular problem.
Physical Units Method- each unit of the final product costs as much to produce as any other
Weighted Average Method- weight factors to reflect differing materials, complexity, time, etc.
Sales-Value-at-Split-Off- Allocates joint cost based on each products proportionate share of sales value at split-off
Net Realizable Value- joint cost based on hypothetical market price (eventual market value minus processing costs beyond
split-off)
Constant Gross Margin Percentage- Allocates joint costs such that the gross margin is the same for each product