Ch 16 Flashcards
Operating (production) department (example L’Oréal)
Directly adds value to product (make-up,skin care)
Support (service) department (example L’Oréal)
Assists other internal departments (both operating departments and other support departments) -> don’t directly need to produce
- HR, R&D, IT, marketing
What do we do in ‘allocating support department costs’
Allocate support costs among various operating departments
Single rate method
Doesn’t distinguish bw fixed and variable costs: one cost pool, single allocation base
Dual rate method
Distinguishes bw variable and fixed costs: two cost pools, two allocation bases
3 diff allocation bases
- Budgeted oh rate and budgeted hrs
- budgeted oh rate and actual hours
- actual oh rate and actual hrs
3 diff allocation bases
- Budgeted oh rate and budgeted hrs
- budgeted oh rate and actual hours
- actual oh rate and actual hrs
Advantages single rate
- less costly
- user departments have operational control over the charges their bear
Disadvantages single rate
Operating department managers making decisions that are good for them, bad for company
Advantages Dual rate method
- Department managers are guided to make decisions that benefit each department AND organization as a whole
- using budgeted usage to allocate FC helps user departments with short and long run planning: know costs in advance
Disadvantages Dual rate method
- diff to distinguish VC from FC
- operating managers don‘t know costs of fixed support department costs since fixed costs are allocated to operating department based on budgeted rather than actual usage
- allocating fixed costs on the basis of budgeted long-run usage may tempt some managers to underestimate their planned usage
Budgeted vs actual rates
Actual rates: uncertainty on user departments
Budgeted rates: motivate support managers to improve efficiency
Budgeted vs actual usage
Actual usage: better since variable cost linked to usage
Budgeted usage: worse: no incentive to control consumption of support services
Direct method
Only allocate support dpt costs to operating dpt (NOT to other support departments
Step-down method
Allocate support dpt costs to operating dpt and other support dpt in sequential manner
- partially recognises mutual services among support dpt
Reciprocal method
Allocates support dpt costs to operating dpt by fully recognizing mutual services bw support dpt
Which method is most precise
Reciprocal method
Common costs
Cost of operating facility, activity or cost object when its shared by several users
Two methods to allocate common costs
Stand alone and incremental cost allocation
Stand-alone method
Determines weight for costa location by considering users as separate entities: allocation percentages are calculated from whole and applied to common costs
Incremental cost allocation
Ranks the according to which user is most responsible for common costs: sés ranking to allocate costs
Steps incremental cost allocation
- First user: highest costs: costs up to the costs of stand alone user
- Second and more: additional costs that arises from two rather than one user
CASB
Cost accounting standard board
Revenue object
Anything for which separate measurement of revenue is desired
Bundled product
Package of products
Two methods to allocate revenue to bundled products
- Stand-alone method
- Incremental revenue method
Stand alone method to allocate revenue to bundled products
Find weights to allocate revenues:
1. Selling price
2. Unit costs
3. Physical units
Incremental revenue-allocation to allocate revenue of bundled products
Allocate costs according to ranking:
1. First ranked product = primary product
2. Second and more = incremental products
Fixed cost allocation based on bgt rates and bgt usage
- bdgt usage as allocation base: user dpt receive lump sum fixed cost charge
- rates can be set on bgtd usage or practical capacity
Fixed cost allocation based on bdgt rates and actual usage
Hello- if actual usage = bdgt usage, but less than practical capacity 100% of the dpt costs are allocated even though department had idle capacity
Allocating bdgt fixed costs based on actual usage
- user dpt wont know fixed cost allocations until end of period
Difference among three methods increase, as…
1) reciprocal allocation increase
2) difference across operating dpt‘s usage of support dpts increase
