Cost Allocation
Introduction
Cost allocation is an inescapable problem
in nearly every organisation and in
nearly every facet of accounting.
This chapter emphasises the allocation of
costs to divisions, plants, departments,
and contracts.
The chapter also addresses the allocation
of costs to products and customers.
Learning Objectives
1. Outline four purposes for allocating costs to cost objects
2. Describe how a costing system can have multiple cost
objects
3. Discuss key decisions faced when collecting costs in
indirect cost pools
4. Describe how the single-rate cost-allocation method
differs from the dual-rate method
5. Explain how the choice of budgeted versus actual
allocation rates changes the risks that managers face
6. Distinguish among direct allocation, step-down and
reciprocal methods of allocating support department
costs
7. Distinguish between the incremental and stand-alone
cost-allocation methods
8. Criterias used to guide cost-allocation decisions
Learning Objective 1
Describe
Describe how
how aa costing
costing system
system
can
can have
have multiple
multiple cost
cost objects
objects
Learning Objective 3
Paris Prague
Treasury costs:
600,000
(2/3) and (1/3) 400,000 200,000
Human resources
costs: 1,200,000
(40%) and (60%) 480,000
720,000
Total allocated to
divisions 880,000 920,000
Learning Objective 3 (continued)
Corporate treasury and human resources costs are
reallocated by the divisions to Assembly.
Corporate human resource management costs are
reallocated by the divisions to the Department of Human
Resources.
Division costs are reallocated to the departments within
the division.
The Paris division of Sandy Corporation has two operating
departments Assembly and Finishing, plus two support
departments Maintenance and Human Resources.
The Paris Division management decided to reallocate the
400,000 treasury costs to the Assembly Department, and
the 480,000 human resources costs to its Human
Resources Department.
Learning Objective 3 (continued)
Paris
Paris Division
Division
Assembly
Assembly
direct
direct costs:
costs: 1,300,000
1,300,000 Finishing
Finishing
Corporate
Corporate direct
direct costs:
costs:
costs:
costs: 400,000
400,000 900,000
900,000
Total
Total costs
costs 1,700,000
1,700,000
Learning Objective 3 (continued)
Paris
Paris Division
Division
Human
Human Resources
Resources
Maintenance
Maintenance direct
direct costs:
costs: 1,680,000
1,680,000
direct
direct costs:
costs: Corporate
Corporate
300,000
300,000 costs:
costs: 480,000
480,000
Total
Total costs
costs 2,160,000
2,160,000
Learning Objective 3 (continued)
Assembly
AssemblyDepartment
Department
1,700,000
1,700,000
Finishing
FinishingDepartment
Department
900,000
900,000
Maintenance
MaintenanceDepartment
Department Paris
ParisDivision
Division
300,000
300,000 5,060,000
5,060,000
Human
HumanResources
ResourcesDepartment
Department
2,160,000
2,160,000
Learning Objective 4
Assembly Finishing
Budgeted costs
before allocations: 1,700,000 900,000
Square feet: 110,000 110,000
Number of employees: 48 24
Learning Objective 6 (continued)
Direct Method
allocates support department costs to operating
departments only.
The allocation ratio for allocating Maintenance to
Assembly is 110,000/220,000 300,000 =
150,000.
The allocation ratio for allocating Maintenance to
Finishing is 110,000/220,000 300,000 =
150,000.
The allocation ratio for allocating Human Resources
to Assembly is 48/72 2,160,000 = 1,440,000.
The allocation ratio for allocating Human Resources
to Finishing is 24/72 2,160,000 = 720,000.
Learning Objective 6 (continued)
Assembly Finishing
Original costs: 1,700,000 900,000
Maintenance
Allocated: 150,000 150,000 Human
Resources Allocated:
1,440,000 720,000
Total 3,290,000 1,770,000
Learning Objective 6 (continued)
Step-down Method
allocates support department costs to other
support departments and to operating
departments.
Which support department should be
allocated first?
The support department providing the greatest
percentage of support to other support
departments is allocated first.
Learning Objective 6 (continued)
Maintenance provides 12% of its services to
Human Resources.
Human Resources provides 10% of its services to
Maintenance.
The ratio to allocate Maintenance to Human Resources is
30,000/250,000 (or 12%) 300,000 = 36,000.
The ratio to allocate Maintenance to Assembly is
110,000/250,000 (or 44%) 300,000 = 132,000.
The ratio to allocate Maintenance to Finishing is
110,000/250,000 (or 44%) 300,000 = 132,000.
Learning Objective 6 (continued)
M HR A F
Before allocation:
300,000 2,160,000 1,700,000 900,000 Allocation: (522,267)
62,672 229,797 229,797 Allocation: 222,267
(2,222,672) 1,333,603 666,802 Total
3,263,400 1,796,599