Vous êtes sur la page 1sur 48

Introduction to Management Accounting

Chapter
12

Cost Allocation

12 - 1
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Learning
Objective 1

General Framework for Cost


Allocation

Cost allocation methods comprise an important


part of a companys cost management system.
Four types of cost objectives:
Service departments
Producing departments
Products/services, and
Customers.

12 - 2
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

General Framework for Cost Allocation


Producing departments are where employees
Work on the organizations products or services.

Service departments exist only to


support other departments or customers.

12 - 3
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

General Framework for Cost Allocation

rect costs can be physically traced to each departme


departm
Indirect costs must be allocated.
Many companies develop
allocation methods to assign
service department costs to the
producing departments.

12 - 4
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

General Framework for Cost Allocation

All organizations accumulate costs for their


products or services for financial reporting purposes
Increasingly, companies measure and manage
the costs and profitability of their customers.
Customer related costs include:
Order processing
Customer service sales
commissions
Dedicated customer support

12 - 5
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

General Framework for Cost Allocation

accounting system will assign to a departments out


ts direct costs plus all the indirect costs allocated to
its

ost driver that has a logical, cause-effect relationship


to the cost will be used as a cost-allocation base

12 - 6
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Learning
Objective 2

Allocation of Service Department


Costs

Establish the details regarding


cost allocation in advance.
Allocate variable- and fixedcost pools separately.

Evaluate performance using budgets for


each production and service department.

12 - 7
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Service Department Example


5-year lease

Computer Department
School of Business

School of Engineering

12 - 8
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Service Department Example


Suppose there are two major
purposes for the allocation:
Predicting economic effects
of the use of the computer
Motivating departments and
individuals to use its
capabilities more fully

12 - 9
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Service Department Example


The primary activity performed
is computer processing.

Resources consumed include


1. Processing time
The budget formula for the
2. Operator time
forthcoming year is $100,000
3. Consulting time
monthly fixed cost plus $200
4. Energy
variable cost per hour of
5. Materials
computer time used.
6. Building space

12 - 10
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Variable-Cost Pool
The cost driver for the variable-cost pool is
Actual hours of computer time used.

Therefore, variable costs should


be allocated as follows:
Budgeted unit rate X Actual
hours of computer time used

12 - 11
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Variable-Cost Pool
Consider the allocation of variable
costs to a department that uses
600 hours of computer time.
600 hours $200 = $120,000
Suppose inefficiencies in the
computer department caused the
variable costs to be $140,000
instead of $120,000.

12 - 12
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Variable-Cost Pool
A good cost-allocation scheme would allocate
only the $120,000 to the consuming department
and would let the $20,000 remain as an
unallocated unfavorable budget variance
of the computer department.
This scheme holds computer department
managers responsible for the $20,000
and reduces the resentment of user
managers.

12 - 13
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Fixed-Cost Pool
The cost driver for the fixed-cost pool is
the amount of capacity required when
the computer facilities were acquired.
Fixed costs should be allocated as follows:
Budgeted percent of capacity available for use
Total budgeted fixed costs

12 - 14
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Fixed-Cost Pool
Suppose the deans had originally predicted the
long-run average monthly usage as follows:

School of Business: 210 hours


School of Engineering: 490 hours

How is the fixed-cost pool allocated?


Business:
210 700 = 30%
$100,000 X .3 = $30,000

Engineering:
490 700 = 70%
$100,000 X .7 = $70,000

12 - 15
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Fixed-Cost Pool
This predetermined lump-sum approach
is based on the long-run capacity
available to the user, regardless of
actual usage from month to month.

A major strength of using capacity available rather


than capacity used when allocating budgeted fixed
osts is that actual usage by user departments does no
ect the short-run allocations to other user departmen
ffect

12 - 16
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Reciprocal Services
Service departments often support
other service departments in addition
to production departments.
There are two popular methods for
allocating service department costs:
The direct method
The step-down method

12 - 17
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Learning
Objective 3

Direct and Step-Down Methods

The direct method ignores other service


departments when any given service
departments costs are allocated
to the revenue-producing
(operating) departments.
The step-down method recognizes that some
service departments support the activities
in other service departments as well as
those in production departments.

12 - 18
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Direct and Step-Down Methods


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

12 - 19
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

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

12 - 20
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Direct Method
Human resources cost
allocated to processing =
(16 80) $240,000 = $48,000
Human resources cost
allocated to assembly =
(64 80) $240,000 = $192,000

12 - 21
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

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

12 - 22
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Step-Down Method

$240,000 + $420,000 = $660,000


To processing:
(16 80) $660,000 = $132,000
To assembly:
(64 80) $660,000 = $528,000

12 - 23
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Step-Down Method

Processing department
Direct
Step-Down
Direct department costs
$1,000,000 $1,000,000
From facilities management
1,050,00
700,000
From Personnel
48,000
132,000
Total costs
$2,098,000
$1,832,000

12 - 24
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Step-Down Method

Assembly department
Direct
Step-Down
Direct department costs
$1,600,000 $1,600,000
From facilities management
210,000
140,000
From personnel
192,000
528,000
Total costs
$2,002,000 $2,268,000

12 - 25
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Costs Not Related to Cost Drivers

Identify additional cost drivers.


Allocate all costs by the direct
or step-down method using
square footage as the costallocation base.

12 - 26
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Learning
Objective 4

Traditional Approach

1. Divide the costs in each


producing departments.
Direct costs

Indirect costs

2. Assign direct costs to the appropriate


products, services, or customers.

12 - 27
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Traditional Approach
3. Select one or more cost pools and related
cost drivers in each production department.
Indirect departmental costs

Cost
pool

Cost
pool

Cost
pool

12 - 28
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Traditional Approach
4. Allocate costs
Costs

Product
A

Product
B

Product
C

12 - 29
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Activity-Based Costing
Step 1:
Determine the key
components of the system.

Step 2:
Develop the relationships among
resources, activities, and cost objectives.

12 - 30
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Activity-Based Costing
Step 3:
Collect relevant data concerning costs
and the physical flow of the cost-driver
units among resources and activities.
Step 4:
Calculate and interpret the new
activity-based cost information.

12 - 31
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Learning
Objective 5

Allocation of Customer Costs

Allocate costs associated with


customer actions to customers.

Customer profitability depends on more than gross


margin, it depends on the costs incurred to fulfill
stomer orders and to provide other customer servic

12 - 32
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Allocation of Customer Costs


Customer Type 1
Low Cost to
Serve
Large order quantity
Few order changes
Little pre- and
post-sales support
Regular scheduling
Standard delivery
Few returns

Customer Type
2 High Cost to
Serve

Small order quantity


Many order changes
Large amounts of preand post-sales support
Expedited scheduling
Special delivery requireme
Frequent returns

12 - 33
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Allocation of Customer Costs


Customer Type 1
Low Cost to
Serve

Buys a mix of
products that
have high gross
margins
Has a low cost-toserve %
Has a high level of
profitability

Customer Type
2 High Cost to
Serve

Buys a mix of
products that
have lower gross
margins
Has a high costto-serve %
Has a low level of
profitability

12 - 34
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Allocation of Customer Costs


Assume Cedar City Distributors
(CCD),
distributes many
products to retail outlets.
The products are classified into just
two product groups apparel and
sports gear.
CCD has two types of
customers:
1. Small store
2. Large store

12 - 35
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Allocation of Customer Costs


CCD uses a simple cost accounting
system to calculate both product
and customer profitability.

The only direct costs


are costs of the
purchase of apparel
and sports gear
products.

Costs

Indirect costs are


allocated to the
product groups
using a single
indirect cost pool
for all indirect costs
with pounds of
product as the
allocation base.

12 - 36
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Allocation of Customer Costs

To determine customer profitability:


1. Calculate the profit margin per case for each product
2. Use the product mix ordered by each customer to calculate

Small Stores

Large Stores

Cases
Profit Margin
Total
Cases Profit Margin
Total
per case
Profit Margin
per case
Profit M
Apparel
600 $265.00
$159,000
800 $265.00
Sports Gear 200
315.00
63,000
800
315.00
222,000
464,000
Profit Margin Percentage
43.7%
41.4

12 - 37
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Allocation of Costs-to-Serve

Might number of customer orders


be a
more plausible costallocation base?
The cost of resources used for order
processing and customer service
activities should be included in a
separate cost pool and allocated on
the basis of number of orders.
This system gives managers at
CCD more insight into
operations, and a tool to
measure and manage customer 12 - 38
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Learning
Objective 6

Allocation of Central Costs

Many managers believe it is desirable


to fully allocate all costs to the revenueproducing parts of the organization.
Whenever possible, the preferred
driver for central services is usage.
If a company does allocate the costs of
central services based on sales, although
costs do not vary in proportion to sales, it
should use budgeted, not actual, sales.

12 - 39
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Allocation of Central Costs


Usage

Not always economically viable

Revenue
Total assets
Cost of goods sold
Total cost of each division

12 - 40
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Learning
Objective 7

Allocation of Joint Costs

Two conventional ways of allocating


joint costs to products are widely used:
Physical
units

Relative
sales values

Joint costs include all inputs of material, labor, and


erhead costs that are incurred before the split-off po

12 - 41
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Allocation of Joint Costs


The physical-units
method requires a
common physical
unit for measuring
the output of each
product.

The joint costs are


allocated based on
each products
percentage of the
total physical
units produced.

Allocation of joint costs should


not affect decisions about the
individual products.

12 - 42
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Physical-Units Method
Dow Chemical produces two chemicals, X
and Y. The joint cost is $100,000. X sells
for $.09 per liter and Y for $.06.

Liters
X 1,000,000
Y
500,000
1,500,000

Allocation
Sales Value at
Weighting
of Joint Costs
Split-off Po
(10/15)X$100,000 $ 66,667
$ 90,000
(5/15)X$100,000
33,333
30,000
100,000
120,000

12 - 43
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

Relative-Sales-Value Method
The joint costs are allocated based on each
products sales value as a percentage
of the total sales value at split-off.

12 - 44
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

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.

X
Y

Relative Sales
Value at
Spit-off Point
$ 90,000
30,000
$120,000

Allocation
Weighting
of Joint Costs
(90/120)X$100,000
$ 75,00
(30/120X$100,000
25,000
$100,000

12 - 45
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

By-Product Costs

A by-product is not individually


identifiable until manufacturing
reaches a split-off point.
They have relatively insignificant
sales value.

12 - 46
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

By-Product Costs
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.

12 - 47
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch

The End

End of Chapter 12

12 - 48
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Sch