Professional Documents
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Overhead costs
Abhay Kumar
Methods to Allocate
Support Department Costs
Single-rate method allocates costs in
each cost pool (service department) to
cost objects (production departments)
using the same rate per unit of a single
allocation base
No distinction is made between fixed
and variable costs in this method
Methods to Allocate
Support Department Costs
Dual-Rate method segregates costs
within each cost pool into two segments:
a variable-cost pool and a fixed-cost pool.
Each pool uses a different cost-allocation
base
Allocation of
Support Department Costs
Direct
Step-Down
Reciprocal
Simultaneous equation
Direct Method
Allocates support costs only to Operating
departments
No Interaction between Support Departments
prior to allocation
Direct Method
Support Departments
Production Departments
Information Systems
Manufacturing
Packaging
Accounting
Direct Method
Direct Method
Step-Down Method
Allocates support costs to other support
departments and to operating departments
that partially recognizes the mutual services
provided among all support departments
One-Way Interaction between Support
Departments prior to allocation
Step-Down Method
Support Departments
Production Departments
Information Systems
Manufacturing
Packaging
Accounting
Step-Down Method
Step-Down Method
Reciprocal Method
Allocates support department costs to
operating departments by fully recognizing
the mutual services provided among all
support departments
Full Two-Way Interaction between Support
Departments prior to allocation
Reciprocal Method
Support Departments
Production Departments
Information Systems
Manufacturing
Packaging
Accounting
Reciprocal Method
Reciprocal Method
Total
Maintenance
Facility Mgt
12,60,000 12,60,000
Cost
Human
240,000
Resource Cost
square
27000
footage
Employees in
production
HR Deptt.
Operating Department
Processing
Assembly
15000
3000
16
64
240,000
9000
Allocation of cost
Facilities management cost = $1,260,000
Human resources cost = $240,000
Total square footage in production
departments: 15,000 processing + 3,000
assembly = 18,000
Total employees in production departments
16 processing + 64 assembly = 80
Square footage in human resources = 9,000
Direct Method
Facilities management cost allocated to
processing = (15,000 18,000) $1,260,000 =
$1,050,000
Facilities management cost allocated to assembly
= (3,000 18,000) $1,260,000 = $210,000
Human resources cost allocated to processing =
(16 80) $240,000 = $48,000
Human resources cost allocated to assembly =
(64 80) $240,000 = $192,000
Step-Down Method
To human resources: (9 27) $1,260,000 =
$420,000
To processing:(15 27) $1,260,000 = $700,000
To assembly: (3 27) $1,260,000 = $140,000
Step-Down Method
Processing department
Direct
$1,000,000
1,050,00
48,000
$2,098,000
Step-Down
$1,000,000
700,000
132,000
$1,832,000
Step-Down Method
Assembly department
Direct
Direct department costs
$1,600,000
From facilities management 210,0 00
From personnel
192,000
Total costs
$2,002,000
Step-Down
$1,600,000
140,000
528,000
$2,268,000
Physical units
Relative
sales
values
Dow Chemical produces two chemicals, X and
Y. The joint cost is $100,000. X sells for $.09
per liter and Y for $.06.Production of X & Y is
1000,000 & 500,000 liters respectively.
Allocate the Joint Cost on each product by
Physical units & Relative sales values methods.
Liters
X 1,000,000
Y 500,000
1,500,000
Sales Value at
Weighting
of Joint Costs
(10/15)X$100,000 $ 66,667
(5/15)X$100,000
33,333
100,000
Split-off Point
$ 90,000
30,000
120,000
Relative-Sales-Value Method
When weighting is based on the sales value of
the individual products, the allocation of a
cost to one product depends upon the sales
value of both products.
Physical units
Relative sales values
Relative Sales
Value at
Spit-off Point
X
Y
Weighting
$ 90,000 (90/120)X$100,000
30,000 (30/120X$100,000
$120,000
Allocation
of Joint Costs
$ 75,000
25,000
By-product Cost
A by-product is not individually identifiable until
manufacturing reaches a split-off point.
They have relatively insignificant sales value.
If an item is accounted for as a by-product, only
separable costs are allocated to it.
All joint costs are allocated to the main products.
Any revenues from by-products, less their
separable costs, are deducted from the cost of
the main products.
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