Lecture 5 Flashcards
Types of allocations
Indirect cost of one department to other departments; from one factory to bayous product, jobs, customers
Departmental cost allocations eg from it, hr, fin to production plants
Product cost allocation eg plant overhead to product, jobs
Allocation methods to treat mutual costs of service depts
Direct method
Step down method
Reciprocal method
Direct method
Eg
Indirect costs;m: HR 210,000 IT 300,000
# of fte it (25) hr (5) accounting (30) finance (40)
PCs in use: it (15) hr (10) accounting (20) finance (30)
Allocation base:
Acc (30) fin (40) all base 43% fin 57%
All costs 90,000 (IT) 120,000 (FIN)
PCs in use: all base ACC (20) finance (30)
Allocation base acc 40% fin 60%
All costs 120,000 fin 180,000
Total costs allocated:
Acc 90,000+120,000=210,000
FIn 120,000+180,000 =300,000
Step down method
Eg
Indirect costs;m: HR 210,000 IT 300,000
# of fte it (25) hr (5) accounting (30) finance (40)
PCs in use: it (15) hr (10) accounting (20) finance (30)
Do one first then the next:
It 300,000 indirect costs
Allocation base:
Hr 10, acc 20, fin 30 all base 17%,33%,50%
Allocated costs: hr 50,000 acc 100,000 fin 150,000
Indirect costs hr 210,000+50,000=260,000
Acc 30, FIn 40 acc 43% fin 57%
Allocated costs 112,000 acc, 148,000 fin
Accounting: 100,000 + 112,000 =212,000
Finance 150,000+148000 = 298000
Reciprocal method:
Eg
Indirect costs;m: HR 210,000 IT 300,000
# of fte it (25) hr (5) accounting (30) finance (40)
PCs in use: it (15) hr (10) accounting (20) finance (30)
of FTE
It 25 HR X Acc 30 Fin 40
PCs in use:
It X HR 10 Acc 20 Fin 30
Estimate indirect costs of support department reflecting mutual services and self services (simultaneous equations)
It = 300,000 + 25/95 x 210,000 = 371,560
Hr = 210,000+10/60*300,000 = 271,927
Then allocate:
It to hr 10/60 *371560 = 71560
Acc 20/60 * 371560
Fin 30/60 *371560
Then allocate to HR
IT 25/95 271927 =61927
Acc 30/95271927
40/95*271927
Then the artificial costs are 71560 + 61927
Then the acc and fin = 510,000
Single vs dual rates
Dual rate: indirect costs split into fixed and variable m
Single costs: indirect costs pooled together (fixed + variable)
Single rate could induce bad management decisions:
Single rate looks like variable costs to dept managers
Dept managers might prefer to buy outside (if outride < single raeH
Dual rate (fixed plus variable) could reflect different cost behaviours and focus on overall firm
Cost allocation systems: single rate increases
Indirect costs :
Fixed 300.000
Variable 240,000
Total 540,000
Cost objects: m and pe
Allocation base: hours
M 800, pe 400
Allocation rate 540,000/1200hours = 450 an hour
M: 450800 =360,000
Pe: 450400= 180,000
Total is 360000+180000=540,000
Dual rate example:
Variable costs are based on budgeted numbers: 200h *1200hours
Indirect costs :
Fixed 300.000
Variable 240,000
Total 540,000
Cost objects: m and pe
Allocation base: hours
M 800, pe 400
Variable rate: 200 an hour
Fixed rate:
M = 67% (800/1200)
Pe =33% (400/1200)
For m:
Variable: 800*200=160,000
Fixed 67% *300,000 =200,000
Total 360,000
For pe;
Variable 400*200 =80,000
Fixed 33% *300,000 =100,000
Total 180,000
Total 180,000+360,000 =540000
Budgeting
Budgeted numbers allow better planning for operating units (lower uncertainty)
Budgeted numbers with problem of honest reporting of planned have:
Managers with incentives to understate planned usage
Firms can incentivise (reward / punish) accurate predictions
Budgets can often geared towards past actual numbers (anchoring)
Stand alone vs incremental costs example:
Student going from Mannheim to tilburg and Utrecht. Round trip from Mannheim to Utrecht is 120. Round trip from manhein to tilburg is 80.
Combining the trip ends up at 150. And aces 150.
Stand alone cost allocation is based on the proportion of seperate costs;
Utrecht: 120/(120+80) *150 = 90
Tilburg 80 / (120+80) *150 =60
Incremental cost allocations based on ranking: primary vs incremental. Assume the Utrecht was scheduled first and is primary:
Utrecht 120
Tilburg 150-120 = 30
Traditional vs abc
Traditional is resources to object
Abc is resources activities objects
Abc schematic
First stage: split and allocate overhead costs to activities (many pools)
Second stage; allocate costs of activities to different cost drivers ( many cost drivers)
Overhead costs:
Activity cost pools (machining cost pool, supervising cost pool etc)
Cost drivers (number of setups, number of parts)
Cost hierarchy
A cost hierarchy categorises costs into different cost pools on the basis of the different types of cost drivers (or cost allocation base) or different degrees of difficulty in determining cause and effect (or benefits received) relationships
Typically 4 levels:
Unit level: each individual unit (eg direct labour direct mat)
Batch level : group of products (eg set up, inspection)
Product/ service sustaining: individual products or services (eg rd, design, marketing)
Facility sustaining: organisation as a whole (eg lighting, heating, management)
Traditional approach example:
Firm produces dvd and more complex dvds. It wants to calculate the production costs of both the products. Dm cost are 10 and 15 per unit. Dl costs are 12 and 14. the company incurs overhead of 300,000. Allocation bas for overhead are dl costs. 15,000 simple and 5000 complex dvd are produced.
Simple dvd; Dm: 10*15000=150,000 Dl: 12*15,000= 180,000 Complex dvd: Dm: 15*5000=75,000 DL: 14*5000=70,000
Overhead is allocated on dl costs so:
180,000+ 70,000=250,000
So simple is 180,000/250,000=72%
Complex is 100-72% =28%
Overheads:
Simple= 72% x 300,000=216000
Complex: 28% * 300,000=84,000
Total costs:
Simple: 546,000
Complex: 229,000
Per unit costs:
Simple:546,000/15000 = 36.40
Complex: 229,000/5000= 45.80
Abc approach: example
According to management 160,000 of the total costs are in the design stage and are driven by # or oarts in dvd. Simple has 50 parts, complex has 100. The rest(140,000) is mainly indirect labour for setting up the assembly machine: product generate overhead according to the # of set ups. Each production batch requires 1 set up. Simple are produced in batches of 500 units and the complex in batches of 100 units.
complex dvds. It wants to calculate the production costs of both the products. Dm cost are 10 and 15 per unit. Dl costs are 12 and 14. the company incurs overhead of 300,000. Allocation bas for overhead are dl costs. 15,000 simple and 5000 complex dvd are produced.
Step 1: split and adding overhead to activities
Activity 1: design costs 160,000
Activity 2: set up costs 140,000
Step 2; determine cost drivers rate to allocate costs to products
Activity 1: 160,000/ 150 =1067 / part
Activity 2: 140,000 / 80 = 1759 / set up
With abc:
Simple: Dm 150,000 Dl 180,000 Overhead (deign) 1067*50 =53350 Overhead set up 1750*30 =52500 Total costs 435850 Per unit 435850/15000=29.06 Per unit tradiiotnak: 36.4
Complex: Dm: 75000 Dl:70000 Overhead (design) 1067*109 =106700 Overhead (set ups) 1750*50=87500 Total costs 339200 Per unit costs abc 339200/5000= 67.84 Per unit cost traditional: 45.80
