* The aim of allocating support department costs to the production departments is to inform the managers of the services provided by the support department. * This will assist them to plan and control the use of the services
0/0/00
AF201 DFL Sem 1,2009
4
Process of allocation
0/0/00
AF201 DFL Sem 1,2009
5
3 methods of support dept. cost allocation
* The Direct method
* The Step-down method
* The Reciprocal method
0/0/00
AF201 DFL Sem 1,2009
6
The direct method
* Only allocate support dept. costs directly to production dept. that consume part of the support dept's. output. * Shortcoming: ignores the services provided by the support department to other support departments. * Proportion allocated to each production dept. relates to the relative proportionconsumed by the production dept.
Continued
0/0/00
AF201 DFL Sem 1,2009
7
DirectMethod
* Suppose there are two support depts. Power & Maintenance, and two producing depts. Grinding & Assembly, each with a "bucket" of directly traceable overhead costs.
* Objective: Distribute all Power & Maintenance costs to Grinding & Assembly using the direct method (Hansen & Mowen 1997)
Continued
0/0/00
AF201 DFL Sem 1,2009
8
DirectMethod
* DirectMethod - Allocate Power and Maintenance costs only to Grinding and Assembly
(Hansen & Mowen, 1997)
Continued
0/0/00
AF201 DFL Sem 1,2009
9
DirectMethod
* After allocation - Zero cost in power and Maintenance, all overhead cost in Grinding and Assembly (Hansen & Mowen, 1997)
Continued
0/0/00
AF201 DFL Sem 1,2009
10
Lecture Illustration
* Directmethod Refer to hand out
Continued
0/0/00
AF201 DFL Sem 1,2009
11
DirectMethod
0/0/00
AF201 DFL Sem 1,2009
12
DirectMethod
0/0/00
AF201 DFL Sem 1,2009
13
The Sequential method
(Step-down method)
* This method allocates the support department costs through partial recognition of services provided by one support department to the other. * It partially overcomes the shortcoming of the direct method.
Continued
0/0/00
AF201 DFL Sem 1,2009
14
Sequence of cost allocation
* Steps (1) Allocate the cost of support dept. that serves the largest no. of other support depts. The dept. with the least support services is allocated last. (2) Allocate each support dept's. costs among the production dept. & all the other support depts., following the sequence Where a tie exists, the support dept. with the largest OH budget is allocated first.
Continued
0/0/00
AF201 DFL Sem 1,2009
15
Lecture Illustration
* Sequential Method Refer to handout
Continued
0/0/00
AF201 DFL Sem 1,2009
16
Sequential method
* Suppose there are two support depts., Power & Maintenance, and two producing depts., Grinding & Assembly, each with a "bucket" of directly traceable overhead cost.
* Objective: Distribute all Power and Maintenance costs to Grinding and Assembly using the Sequential Method. (Hansen & Mowen, 1997)
Continued
0/0/00
AF201 DFL Sem 1,2009
17
Sequential Method
* Step1: Rank support depts - #1 Power, #2 Maintenance.
* Step 2: Distribute Power to Maintenance, Grinding, and Assembly
* Then, distribute Maintenance to Grinding and Assembly
(Hansen & Mowen, 1997)
Continued
0/0/00
AF201 DFL Sem 1,2009
18
Step-down method
* After allocation - Zero cost in Power and Maintenance, all overhead cost in Grinding and Assembly.
(Hansen & Mowen, 1997) Continued
0/0/00
AF201 DFL Sem 1,2009
19
Sequential Method
0/0/00
AF201 DFL Sem 1,2009
20
Sequential Method
0/0/00
AF201 DFL Sem 1,2009
21
The reciprocal method
* This method allocates the support department costs by fully recognising the provision of services between the support depts. * It provides a more complete picture of support dept. cost allocation than the directmethod and step-down method.
Continued
0/0/00
AF201 DFL Sem 1,2009
22
Sequence of cost allocation
* Steps: (1) Specify a set of equations that express the relationship between the support departments. (2) Solve the simulataneous equations. (3) Allocate the total cost of operating each support dept. to various depts., that use its services.
Continued
0/0/00
AF201 DFL Sem 1,2009
23
Lecture illustration
* Reciprocal Method ** Refer to handout
Continued
0/0/00
AF201 DFL Sem 1,2009
24
Reciprocal Method
0/0/00
AF201 DFL Sem 1,2009
25
Reciprocal Method
* Simultaneous Equations
P = Direct costs + Share of Maintenance's costs = $250,000 + 0.10M………………………. (1)
M = Direct costs + Share of Power's costs = $160,000 + 0.20P ………………………..(2)
Continued
0/0/00
AF201 DFL Sem 1,2009
26
Reciprocal Method
Solving Simulataneous Equations
M = $160,000 + 0.2 ($250,000 + 0.1M) M = $160,000 + $50,000 +0.02M 0.98M = $210,000 M = $214,286 Substituting value of M into equation (1) to find P P = $250,000 + 0.10 ($214,286) = $250,000 + 21,429 = $271,429 Continued
0/0/00
AF201 DFL Sem 1,2009
27
Reciprocal Method
0/0/00
AF201 DFL Sem 1,2009
28
Comparison
Direct Sequential Reciprocal Grind. Assmb. Grind. Assmb. Grind. Assmb. DC: $100,000 $ 60,000 $100,000 $ 60,000 $100,000 $ 60,000 Allo.frm Power: 187,500 62,500 150,000 50,000 162,857 54,286 Allo.frm Maint. 80,000 80,000 105,000 105,000 96,429 96,429 Total $367,500 $202,500 $355,000 $215,000 $359,286 $210,715
0/0/00
AF201 DFL Sem 1,2009
29
Choice of method.
* The choice is simply one of costs versus benefits. * Choice of allocationbase is also a cost versus benefits decisions.
0/0/00
AF201 DFL Sem 1,2009
30
Other issues
* Allocating support dept. costs in a service organisation. * Costallocationin modern manufacturing environments
0/0/00
AF201 DFL Sem 1,2009
31
Summary
* Allocating support department costs helps departmental managers to plan and control the use of support dept. services. * The three methods of support dept. cost allocation are: directmethod, step-down method, & reciprocal method. * The choice of methoddepends on a cost versus benefit basis
Copyright © 2026 eLLeNow.com All Rights Reserved.
