Re-apportionment of service cost centre costs F2 Management Accounting ACCA Qualification Students

The term „by-products” refers to a sub-category of joint products that have relatively insignificantsales values as a proportion of the value of the entire group from which they are derived. Since maintenance costs are allocated to administration and administration cost is allocated to maintenance — things get interesting. You will need to determine the TOTAL cost being allocated to both the Administration and Maintenance Departments first. Since maintenance costs are allocated toadministration and administration cost is allocated to maintenance— things get interesting. You will need to determine the TOTAL costbeing allocated to both the Administration and MaintenanceDepartments first.

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These operating departments perform the primary purpose of the company—to produce goods and services for consumers. Examples of operating departments are the assembly departments of manufacturing firms and the departments in hotels that take and confirm reservations. Discuss how a plant wide overhead rate tends to distort product costs. If the company uses the sales value at the split-off point as the allocation basis, the products will appear to be equally profitable at the point of separation. Although someobservers might argue that the products are not equally profitable at the split-off point, this method produces allocations that will not tend to confusethe decisions involved.

1: Allocation of Service Department Costs

Both the direct and step-down methods understate power costs by $9,585, or approximately 9.6%. On the otherhand, maintenance costs are understated by $17,261 using the direct method and $6,150 using the step-down method. These differences are likely to besignificant in terms of evaluating the service department costs, particularly in cases where a „make or buy” (outsourcing) decision is involved.

Allocating Fully Reciprocated Costs to Production Departments

For example, the cost driver for the procurement activity might be the number of purchase orders processed, while the cost driver for production could be the number of machine setups required. By linking costs to these drivers, ABC provides a more granular view of how resources are consumed across different activities. Discover modern cost allocation methods to enhance management efficiency and optimize resource distribution in multi-department organizations.

• For example, if a company undergoes a significant restructuring, the allocation of HR services might need to be adjusted to account for changes in employee distribution across departments.
• If a firm produces many different products that consumeindirect resources in different proportions, then a two stage approach is needed to provide accurate product costs.
• Although each product passes through both departments, the products do not consume the departmentresources in the same proportions.
• Examples of bases used to allocate service department costs are number of employees, machine-hours, direct labor-hours, square footage, and electricity usage.

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This approach not only fosters efficiency but also presents unique challenges in cost allocation. Accurately distributing the costs of shared services is essential to ensure that each department bears its fair share of expenses, thereby promoting transparency and accountability. The ABC method begins solve your irs tax problems bbb ‘a+’ rated tax debt relief by identifying the key activities within an organization that consume resources. These activities could range from procurement and production to marketing and customer service. Each activity is then assigned a cost driver, which is a factor that directly influences the cost of the activity.

From the management decision perspective, joint cost allocations are useless because they are not relevant in decisions concerning the separate products. For example, decisionsconcerning whether to continue or discontinue producing the joint products depend on their combined value, not the value of any particular product at thesplit-off point. Therefore, it has been argued that the joint costs should not be allocated at all. However, if the joint costs are not allocated, a valuestill needs to be placed on the unsold inventory for financial reporting purposes. To solve this dilemma some companies value the inventory at finalsales value, less after split-off cost, i.e., NRV.

Fixed costs are allocated in proportion to the original capacity available to the user departments. Variable costs areallocated using a rate of $100 per kilowatt hour. The purposes of cost allocations are closely related to the purposes of information systems outlined in Chapter 2 (See Exhibit 2-4 for a review).

Accountants allocate service department costs using some type of base. When the companies’ managers choose bases to use, they consider such criteria as the types of services provided, the benefits received, and the fairness of the allocation method. Examples of bases used to allocate service department costs are number of employees, machine-hours, direct labor-hours, square footage, and electricity usage. The dual rate or flexible budget method refers to using separate rates, or allocations for fixed and variable service costs. The purpose of this method is to prevent the actualcost allocations to users from being influenced by the quantity of service consumed by other users.

As a result the firm’s management needs to know how much cost could be avoided if the electric power plant were closed, and how much electricity would be needed if it were purchased externally. The company used three million kilowatt hours of electricity during the previous period. A third method, referred to as activity based product costing, also involves a two stage allocation process where the first stage is essentially the same as in thetraditional two stage approach. However, in the second stage of the ABC approach, overhead costs are separated into cost pools so that different typesof costs can be traced to products more accurately using different types of activity measures. While some of the activity measures may be related toproduction volume, other non-production volume related activity measures are also used.

The process begins with the service department that provides the most services to other departments, and then moves on to the next, and so forth. For example, in a hospital, the costs of the housekeeping department might be allocated first, followed by the costs of the maintenance department. This method acknowledges the interdependencies between departments, offering a more nuanced view of cost distribution. However, it can be more complex to implement and requires a thorough understanding of departmental interactions.