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Managerial Accounting ed 15 Chapter 11B
Managerial Accounting ed 15 Chapter 11B
Managerial Accounting ed 15 Chapter 11B
Managerial Accounting ed 15 Chapter 11B
Managerial Accounting ed 15 Chapter 11B
Managerial Accounting ed 15 Chapter 11B
Managerial Accounting ed 15 Chapter 11B
Managerial Accounting ed 15 Chapter 11B
Managerial Accounting ed 15 Chapter 11B
Managerial Accounting ed 15 Chapter 11B
Managerial Accounting ed 15 Chapter 11B
Managerial Accounting ed 15 Chapter 11B
Managerial Accounting ed 15 Chapter 11B
Managerial Accounting ed 15 Chapter 11B
Managerial Accounting ed 15 Chapter 11B
Managerial Accounting ed 15 Chapter 11B
Managerial Accounting ed 15 Chapter 11B
Managerial Accounting ed 15 Chapter 11B
Managerial Accounting ed 15 Chapter 11B
Managerial Accounting ed 15 Chapter 11B
Managerial Accounting ed 15 Chapter 11B
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Managerial Accounting ed 15 Chapter 11B

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Managerial Accounting ed 15 Chapter 11B

Managerial Accounting ed 15 Chapter 11B

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  • 1. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Service Department Charges Appendix 11B
  • 2. 11B-2 Learning Objective 6 Charge operating departments for services provided by service departments.
  • 3. 11B-3 Service Department Charges OperatingOperating DepartmentsDepartments Carry out centralCarry out central purposes ofpurposes of organization.organization. Service Departments Do not directly engage in operating activities.
  • 4. 11B-4 Reasons for Charging Service Department Costs To encourage operating departments to wisely use service department resources. To encourage operating departments to wisely use service department resources. To provide operating departments with more complete cost data for making decisions. To provide operating departments with more complete cost data for making decisions. To help measure the profitability of operating departments. To help measure the profitability of operating departments. To create an incentive for service departments to operate efficiently. To create an incentive for service departments to operate efficiently. Service department costs are charged to operating departments for a variety of reasons including:
  • 5. 11B-5 $ Transfer Prices Operating Departments Service Departments The service department chargesThe service department charges considered in this appendix can beconsidered in this appendix can be viewed as a transfer price that isviewed as a transfer price that is charged for services provided bycharged for services provided by service departments to operatingservice departments to operating departments.departments. The service department chargesThe service department charges considered in this appendix can beconsidered in this appendix can be viewed as a transfer price that isviewed as a transfer price that is charged for services provided bycharged for services provided by service departments to operatingservice departments to operating departments.departments.
  • 6. 11B-6 Charging Costs by Behavior Whenever possible,Whenever possible, variable and fixedvariable and fixed service department costsservice department costs should be chargedshould be charged separately.separately.
  • 7. 11B-7 Variable service department costs should be charged to consuming departments according to whatever activity causes the incurrence of the cost. Charging Costs by Behavior
  • 8. 11B-8 Charge fixed service department costs to consuming departments in predetermined lump-sum amounts that are based on the consuming department’s peak-period or long-run average servicing needs. Charge fixed service department costs to consuming departments in predetermined lump-sum amounts that are based on the consuming department’s peak-period or long-run average servicing needs. Are based on amounts ofAre based on amounts of capacity each consumingcapacity each consuming department requires.department requires. Should not vary fromShould not vary from period to period.period to period. Charging Costs by Behavior
  • 9. 11B-9 Should Actual or Budgeted Costs Be Charged? Budgeted variable and fixed service department costs should be charged to operating departments.
  • 10. 11B-10 Sipco has a maintenance department and two operating departments: Cutting and Assembly. Variable maintenance costs are budgeted at $0.60 per machine hour. Fixed maintenance costs are budgeted at $200,000 per year. Data relating to the current year are: Allocate maintenance costs to the two operating departments. Percent of Peak-Period Operating Capacity Hours Hours Departments Required Planned Used Cutting 60% 75,000 80,000 Assembly 40% 50,000 40,000 Total hours 100% 125,000 120,000 Sipco: An Example
  • 11. 11B-11 Cutting Assembly Department Department Variable cost allocation: $0.60 × 80,000 hours 48,000$ $0.60 × 40,000 hours 24,000$ Fixed cost allocation: Total allocated cost Actual hours Sipco: End of the Year
  • 12. 11B-12 Cutting Assembly Department Department Variable cost allocation: $0.60 × 80,000 hours 48,000$ $0.60 × 40,000 hours 24,000$ Fixed cost allocation: 60% × $200,000 120,000 40% × $200,000 80,000 Total allocated cost 168,000$ 104,000$ Percent of peak-period capacity. Sipco: End of the Year Actual hours
  • 13. 11B-13 Quick Check  Foster City has an ambulance service that is used by the two public hospitals in the city. Variable ambulance costs are budgeted at $4.20 per mile. Fixed ambulance costs are budgeted at $120,000 per year. Data relating to the current year are: Percent of Peak-Period Capacity Miles Miles Hospitals Required Planned Used Mercy 45% 15,000 16,000 Northside 55% 17,000 17,500 Total 100% 32,000 33,500
  • 14. 11B-14 Quick Check  How much ambulance service cost will be allocated to Mercy Hospital at the end of the year? a. $121,200 b. $254,400 c. $139,500 d. $117,000 How much ambulance service cost will be allocated to Mercy Hospital at the end of the year? a. $121,200 b. $254,400 c. $139,500 d. $117,000
  • 15. 11B-15 Quick Check  How much ambulance service cost will be allocated to Mercy Hospital at the end of the year? a. $121,200 b. $254,400 c. $139,500 d. $117,000 How much ambulance service cost will be allocated to Mercy Hospital at the end of the year? a. $121,200 b. $254,400 c. $139,500 d. $117,000 Mercy Northside Variable cost allocation: $4.20 × 16,000 miles 67,200$ $4.20 × 17,500 miles 73,500$ Fixed cost allocation 45% × $120,000 54,000 55% × $120,000 66,000 Total allocated cost 121,200$ 139,500$
  • 16. 11B-16 Allocating fixed costs using a variable allocation base that fluctuates period to period. Pitfalls in Allocating Fixed Costs
  • 17. 11B-17 Using sales dollars as an allocation base. Pitfalls in Allocating Fixed Costs Sales of one department influence the service department costs allocated to other departments.
  • 18. 11B-18 Autos R Us – An Example Autos R Us has one service department and three sales departments, New Cars, Used Cars, and Car Parts. The service department costs total $80,000 for both years in the example. Contrary to good practice, Autos R Us allocates the service department costs based on sales. Autos R Us has one service department and three sales departments, New Cars, Used Cars, and Car Parts. The service department costs total $80,000 for both years in the example. Contrary to good practice, Autos R Us allocates the service department costs based on sales.
  • 19. 11B-19 Autos R Us – First-year Allocation New Used Parts Total Sales by department 1,500,000$ 900,000$ 600,000$ 3,000,000$ Percentage of total sales 50% 30% 20% 100% Allocation of service department costs 40,000$ 24,000$ 16,000$ 80,000$ Departments $1,500,000 ÷ $3,000,000 50% of $80,000 In the next year, the manager of the New Cars department increases sales by $500,000. Sales in the other departments are unchanged. Let’s allocate the $80,000 service department cost for the second year given the sales increase. In the next year, the manager of the New Cars department increases sales by $500,000. Sales in the other departments are unchanged. Let’s allocate the $80,000 service department cost for the second year given the sales increase.
  • 20. 11B-20 Autos R Us – Second-year Allocation New Used Parts Total Sales by department 2,000,000$ 900,000$ 600,000$ 3,500,000$ Percentage of total sales 57% 26% 17% 100% Allocation of service department costs 45,714$ 20,571$ 13,715$ 80,000$ Departments $2,000,000 ÷ $3,500,000 57% of $80,000 If you were the manager of the New Cars department, you would likely complain about the increased service department costs allocated to your department. If you were the manager of the New Cars department, you would likely complain about the increased service department costs allocated to your department.
  • 21. 11B-21 End of Appendix 11B

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