Managerial Accounting 15th ed Chapter 4B

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Managerial Accounting 15th ed Chapter 4B

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Managerial Accounting 15th ed Chapter 4B

  1. 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 Allocations Appendix 4B
  2. 2. 4B-2 Operating Departments An operating department carries out the central purpose of the organization. An operating department carries out the central purpose of the organization. The Surgery Department at Mount Sinai Hospital. The Surgery Department at Mount Sinai Hospital. The Production Departments at Mitsubishi. The Production Departments at Mitsubishi. The Geography Department at the University of Washington. The Geography Department at the University of Washington.
  3. 3. 4B-3 Service Departments Service departments do not directly engage in operating activities. Service departments do not directly engage in operating activities. The Accounting Department at Macy’s. The Accounting Department at Macy’s. The Human Resources Department at Walgreens. The Human Resources Department at Walgreens. The Cafeteria at Genesco. The Cafeteria at Genesco. The Internal Audit Department at Exxon. The Internal Audit Department at Exxon.
  4. 4. 4B-4 Interdepartmental Services Service Department Service Department Operating Department Operating Department Costs of the service department become overhead costs to the operating department.
  5. 5. 4B-5 Allocation Approaches
  6. 6. 4B-6 Reciprocal Services Service Department 1 Service Department 2 When service departments provide services to each other we call them reciprocal services.
  7. 7. 4B-7 Learning Objective 10 Allocate service department costs to operating departments using the direct method.
  8. 8. 4B-8 Direct Method Service Department (Cafeteria) Service Department (Custodial) Operating Department (Machining) Operating Department (Assembly) Interactions between service departments are ignored and all costs are allocated directly to operating departments. Interactions between service departments are ignored and all costs are allocated directly to operating departments.
  9. 9. 4B-9 Direct Method – An Example Service Departments Operating Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$ Number of employees 15 10 20 30 Square feet occupied 5,000 2,000 25,000 50,000 Service Department Allocation Base Cafeteria Number of employees Custodial Square feet occupied
  10. 10. 4B-10 Direct Method – An Example Service Departments Operating Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$ Cafeteria allocation ? ? ? Custodial allocation ? ? ? Total after allocation ? ? ? ? How much of the Cafeteria and Custodial costs should be allocated to each operating department using the direct method of cost allocation?
  11. 11. 4B-11 Service Departments Operating Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$ Cafeteria allocation (360,000) 144,000 ? Custodial allocation ? ? ? Total after allocation $ 0 ? ? ? Direct Method – An Example Allocation base: Number of employeesAllocation base: Number of employees
  12. 12. 4B-12 Service Departments Operating Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$ Cafeteria allocation (360,000) 144,000 216,000 Custodial allocation ? ? ? Total after allocation $ 0 ? ? ? Direct Method – An Example Allocation base: Number of employees $360,000 × 30 20 + 30 = $216,000
  13. 13. 4B-13 Service Departments Operating Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$ Cafeteria allocation (360,000) 144,000 216,000 Custodial allocation (90,000) 30,000 ? Total after allocation $ 0 $ 0 574,000$ ? Direct Method – An Example Allocation base: Square feet occupiedAllocation base: Square feet occupied $90,000 × 25,000 25,000 + 50,000 = $30,000
  14. 14. 4B-14 Service Departments Operating Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$ Cafeteria allocation (360,000) 144,000 216,000 Custodial allocation (90,000) 30,000 60,000 Total after allocation $ 0 $ 0 574,000$ 976,000$ Direct Method – An Example Allocation base: Square feet occupiedAllocation base: Square feet occupied
  15. 15. 4B-15 Learning Objective 11 Allocate service department costs to operating departments using the step-down method.
  16. 16. 4B-16 Operating Department (Machining) Operating Department (Assembly) Step-Down Method Service Department (Cafeteria) Service Department (Custodial) Once a service department’s costs are allocated, other service department costs are not allocated back to it.
  17. 17. 4B-17 Step-Down Method There are three key points to understand regarding the step-down method:  In both the direct and step-down methods, any amount of the allocation base attributable to the service department whose cost is being allocated is always ignored.  Any amount of the allocation base that is attributable to a service department whose cost has already been allocated is ignored.  Each service department assigns its own costs to operating departments plus the costs that have been allocated to it from other service departments.
  18. 18. 4B-18 Service Departments Operating Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$ Number of employees 15 10 20 30 Square feet occupied 5,000 2,000 25,000 50,000 Service Department Allocation Base Cafeteria Number of employees Custodial Square feet occupied Recall the data used in the direct method example.Recall the data used in the direct method example. Step-Down Method – An Example
  19. 19. 4B-19 Service Departments Operating Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$ Cafeteria allocation ? ? ? ? Custodial allocation ? ? ? Total after allocation ? ? ? ? Allocate Cafeteria costs first since it provides more service than Custodial. Allocate Cafeteria costs first since it provides more service than Custodial. Step-Down Method – An Example
  20. 20. 4B-20 Service Departments Operating Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$ Cafeteria allocation (360,000) 60,000 ? ? Custodial allocation ? ? ? Total after allocation $ 0 ? ? ? $360,000 × 10 10 + 20 + 30 = $60,000 Allocation base: Number of employeesAllocation base: Number of employees Step-Down Method – An Example
  21. 21. 4B-21 Service Departments Operating Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$ Cafeteria allocation (360,000) 60,000 120,000 ? Custodial allocation ? ? ? Total after allocation $ 0 ? ? ? $360,000 × 20 10 + 20 + 30 = $120,000 Allocation base: Number of employeesAllocation base: Number of employees Step-Down Method – An Example
  22. 22. 4B-22 Service Departments Operating Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$ Cafeteria allocation (360,000) 60,000 120,000 180,000 Custodial allocation ? ? ? Total after allocation $ 0 ? ? ? $360,000 × 30 10 + 20 + 30 = $180,000 Allocation base: Number of employeesAllocation base: Number of employees Step-Down Method – An Example
  23. 23. 4B-23 Service Departments Operating Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$ Cafeteria allocation (360,000) 60,000 120,000 180,000 Custodial allocation (150,000) ? ? Total after allocation $ 0 $ 0 ? ? New total = $90,000 original Custodial cost plus $60,000 allocated from the Cafeteria. Step-Down Method – An Example
  24. 24. 4B-24 Service Departments Operating Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$ Cafeteria allocation (360,000) 60,000 120,000 180,000 Custodial allocation (150,000) 50,000 ? Total after allocation $ 0 $ 0 570,000$ ? $150,000 × 25,000 25,000 + 50,000 = $50,000 Allocation base: Square feet occupiedAllocation base: Square feet occupied Step-Down Method – An Example
  25. 25. 4B-25 Service Departments Operating Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation 360,000$ 90,000$ 400,000$ 700,000$ Cafeteria allocation (360,000) 60,000 120,000 180,000 Custodial allocation (150,000) 50,000 100,000 Total after allocation $ 0 $ 0 570,000$ 980,000$ $150,000 × 50,000 25,000 + 50,000 = $100,000 Allocation base: Square feet occupiedAllocation base: Square feet occupied Step-Down Method – An Example
  26. 26. 4B-26 Reciprocal Method Interdepartmental services are given full recognition rather than partial recognition as with the step method. Service Department (Cafeteria) Service Department (Custodial) Operating Department (Machining) Operating Department (Assembly) Because of its mathematical complexity, the reciprocal method is rarely used. Because of its mathematical complexity, the reciprocal method is rarely used.
  27. 27. 4B-27 Quick Check Data for Direct and Step-Down Methods Service Departments Operating Departments ADMIN BACS Accounting Others Departmental costs before allocation 180,000$ 90,000$ 190,000$ 900,000$ Number of employees 15 5 20 80 Number of PCs 12 20 18 102 Allocation bases: Business school administration costs (ADMIN): Number of employees Business Administration computer services (BACS): Number of personal computers The direct method of allocation is used.
  28. 28. 4B-28 Quick Check  How much cost will be allocated from Administration to Accounting? a. $ 36,000 b. $144,000 c. $180,000 d. $ 27,000
  29. 29. 4B-29 How much cost will be allocated from Administration to Accounting? a. $ 36,000 b. $144,000 c. $180,000 d. $ 27,000 Quick Check  Service Departments Operating Departments ADMIN BACS Accounting Others Departmental costs before allocation 180,000$ 90,000$ 190,000$ 900,000$ ADMIN allocation (180,000) 36,000 144,000 $180,000 × 20 20 + 80 = $36,000
  30. 30. 4B-30 Quick Check  How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department? a. $ 52,500 b. $135,000 c. $270,000 d. $ 49,500
  31. 31. 4B-31 How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department? a. $ 52,500 b. $135,000 c. $270,000 d. $ 49,500 Quick Check  Service Departments Operating Departments ADMIN BACS Accounting Others Departmental costs before allocation 180,000$ 90,000$ 190,000$ 900,000$ ADMIN allocation (180,000) 36,000 144,000 BACS allocation - (90,000) 13,500 76,500 Total after allocation -$ -$ 239,500$ 1,120,500$
  32. 32. 4B-32 Quick Check Data Service Departments Operating Departments ADMIN BACS Accounting Others Departmental costs before allocation 180,000$ 90,000$ 190,000$ 900,000$ Number of employees 15 5 20 80 Number of PCs 12 20 18 102 Allocation bases: Business school administration costs (ADMIN): Number of employees Business administration computer services (BACS): Number of personal computers Allocation bases: Business school administration costs (ADMIN): Number of employees Business administration computer services (BACS): Number of personal computers The step-down method of allocation is used.
  33. 33. 4B-33 Quick Check  How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department? a. $35,250 b. $49,072 c. $18,000 d. $26,333
  34. 34. 4B-34 How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department? a. $35,250 b. $49,072 c. $18,000 d. $26,333 Quick Check  Service Departments Operating Departments ADMIN BACS Accounting Others Departmental costs before allocation 180,000$ 90,000$ 190,000$ 900,000$ ADMIN allocation (180,000) 8,571 34,286 137,143 BACS allocation - (98,571) 14,786 83,786 Total after allocation -$ -$ 239,072$ 1,120,929$
  35. 35. 4B-35 End of Appendix 4B

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