Managerial Accounting and

Control Systems

Allocating Support Department Costs

 Departmental Accounting
Primary
goals

To
To control
control costs
costs and
and
Provide
Provide information
information expenses
expenses and
and assist
assist
for
for managers
managers toto use
use with
with evaluating
evaluating
in
in performance
performance managers
managers
evaluation.
evaluation. performances.
performances.
 Information for
Departmental Evaluation
The
The accounting
accounting system
system provides
provides information
information
about
about resources
resources used
used and
and outputs
outputs achieved.
achieved.

Managers use this information to:

 Control operations.
 Appraise performance.
 Allocate resources.
 Plan strategy
 Departmental Expense
Allocation
Direct expenses are
incurred for the sole
benefit of a specific
department.

Indirect expenses
benefit more than one
department and are
allocated among
departments benefited.
22-4
 Illustration of Indirect
Expense Allocation
Classic Jewelry pays its janitorial service $300
per month to clean its store. Management
allocates this cost to its three departments
according to the floor space each occupies.

22-5
 Illustration of Indirect
Expense Allocation
Classic Jewelry pays its janitorial service $300
per month to clean its store. Management
allocates this cost to its three departments
according to the floor space each occupies.

22-6
 Illustration of Indirect
Expense Allocation
Classic Jewelry pays its janitorial service
$300 per month to clean its store.
Management allocates this cost to its three
departments according to the floor space
each occupies.

22-7
 Bases for Allocating
Service Department Costs
Service department costs are shared, indirect
expenses that support the activities of two or
more production departments.

22-8
 Service Department Costs
Question
ABCO
ABCO allocates
allocates its
its $300,000
$300,000 personnel
personnel cost
cost to
to
operating
operating departments
departments based
based on
on the
the number
number of of
employees
employees in in each
each department.
department. The
The assembly
assembly
department
department has has 100
100 employees
employees and
and the
the packing
packing
department
department has has 150
150 employees.
employees. What
What amount
amount of of
cost
cost is
is allocated
allocated toto assembly?
assembly?
a.
a. $100,000
$100,000
b.
b. $120,000
$120,000
c.
c. $150,000
$150,000
d.
d. $180,000
$180,000

22-9
 Service Department Costs
Question
ABCO
ABCO allocates
allocates its
its $300,000
$300,000 personnel
personnel cost
cost to
to
operating
operating departments
departments based
based onon the
the number
number of of
employees
employees in in each
each department.
department. The
The assembly
assembly
department
department has has 100
100 employees
employees and
and thethe packing
packing
department
department has has 150
150 employees.
employees. WhatWhat amount
amount of of
cost
cost is
is allocated
allocated toto assembly?
assembly?
a.
a. $100,000
$100,000 Assembly percentage
b.
b. $120,000
$120,000 = 100 ÷ (100 + 150) = 40%
c.
c. $150,000
$150,000 40% of $300,000 = $120,000
d.
d. $180,000
$180,000

22-10
 Preparing Departmental
Income Statements

Let’s prepare departmental income statements

using the following steps:
 Direct expense accumulation.
 Indirect expense allocation.
 Service department expense allocation.
22-11
 Departmental Expense
Allocation Spreadsheet
Expense General Purch- Hard- House- Appli-
Allocation Account Office asing ware wares ances
Base Balance Dept Dept Dept Dept Dept.
Direct expenses
Salaries Expense Payroll $ 51,900 $ 13,300 $ 8,200 $ 15,600 $ 7,000 $ 7,800
Depreciation - Equip Depn records 1,500 $ 500 $ 300 $ 400 $ 100 $ 200
Supplies Expense Requisitions 900 200 100 300 200 100
Indirect expenses
Rent Expense Floor space 12,000 600 600
4,860 3,240 2,700
Utilities Expense Floor space 2,400 300 300 810 540 450
Advertising Expense Sales 1,000 500 300 200
Insurance Expense 2,500 400 200 900 600 400
Total dept. expenses $ 72,200 $ 15,300 $ 9,700 $ 23,370 $ 11,980 $ 11,850
Service dept. expenses
General Office Dept Sales (15,300) 7650 4590 3060
Purchasing Dept Purchase Orders (9,700) 3,880 2,630 3,190
Total expenses Allocated $ 72,200 $ 0 $ 0 $ 34,900 $ 19,200 $ 18,100

22-12
 Departmental Expense
Allocation Spreadsheet
Expense Allocation to Departments
General Purch- Hard- House- Appli-
Allocation Total Office asing ware wares ances
Base Expense Dept. Dept. Dept. Dept Dept.
Direct expenses
Salaries Payroll $ 51,900 $ 13,300 $ 8,200 $ 15,600 $ 7,000 $ 7,800
Depreciation Exp - Equip Depn Records 1,500 500 300 400 100 200
Supplies Requisitions 900 200 100 300 200 100

Step 1: Direct expenses are traced to service departments

and sales departments without allocation.

22-13
 Departmental Expense
Allocation Spreadsheet
Of a total of 12,000 square feet, the service departments
occupy 1,500 square feet each, the hardware department
occupies 4,050 feet, housewares 2,700, and appliances 2250.
Expense Allocation to Departments
General Purch- Hard- House- Appli-
Allocation Total Office asing ware wares ances
Base Expense Dept. Dept. Dept. Dept Dept

Utilities Floor space 2,400 300 300 810 540 450

Step 2: Indirect expenses are allocated to both the service

and the sales departments based on floor space occupied.
22-14
 Departmental Expense
Allocation Spreadsheet
Salaries Payroll $ 20,000 $ 1,000 $ 2,000 $ 6,000
Supplies Requisitions 1,500 100 300 400
Indirect expenses
Rent Floor space 10,000 1,000 1,000 3,000
Utilities Floor space 1,000 100 100 300
Total dept. expenses $ 32,500 $ 2,200 $ 3,400 $ 9,700
Service dept. expenses
Service Dept. One Sales (2,200) 1,000
Service Dept. Two Employees
Total expenses $ 32,500 $ 0 $ 3,400 $ 10,700

Step 3: The Service department total expenses (original

direct expenses + allocated indirect expenses) from the
two service departments are allocated to three remaining
operating or sales departments. 22-15
Departmental Income Statements
         

  Hardware Housewares Appliances  

  Dept. Dept. Dept. Combined
Sales $ 119,500 $ 71,700 $ 47,800 $ 239,000
Cost of goods sold 73,800 43,800 30,200 147,800
Gross profit on sales $ 45,700 $ 27,900 $ 17,600 $ 91,200
Operating expenses       0
Salaries Expense $ 15,600 $ 7,000 $ 7,800 $ 30,400
Depreciation Expense 400 100 200 700
Supplies Expense 300 200 100 600
Rent Expense 4,860 3,240 2,700 10,800
Utilities Expense 810 540 450 1,800
Advertising Expense 500 300 200 1,000
Insurance Expense 900 600 400 1,900
Share of general office expense 7,650 4,590 3,060 15,300
Share of purchasing expenses 3,880 2,630 3,190 9,700
Total operating expenses $ 34,900 $ 19,200 $ 18,100 $ 72,200
Net income (loss) $ 10,800 $ 8,700 $ (500) $ 19,000
         
22-16
         
 Departmental Income Statement
         

  Hardware Housewares Appliances  

  Dept. Dept. Dept. Combined
Sales $ 119,500 $ 71,700 $ 47,800 $ 239,000
Cost of goods sold 73,800 43,800 30,200 147,800
Gross profit on sales $ 45,700 $ 27,900 $ 17,600 $ 91,200
Operating expenses       0
Salaries Expense $ 15,600 $ 7,000 $ 7,800 $ 30,400
Depreciation Expense 400 100 200 700
Supplies Expense 300 200 100 600
Rent Expense 4,860 3,240 2,700 10,800
Utilities Expense 810 540 450 1,800
Advertising Expense 500 300 200 1,000
Insurance Expense 900 600 400 1,900
Share of general office expense 7,650 4,590 3,060 15,300
Share of purchasing expenses 3,880 2,630 3,190 9,700
Total operating expenses $ 34,900 $ 19,200 $ 18,100 $ 72,200
Net income $ 10,800 $ 8,700 $ (500) $ 19,000
         
          22-17
 Departmental Contribution to OH

         

  Hardware Housewares Appliances  

  Dept. Dept. Dept. Combined
Sales $ 119,500 $ 71,700 $ 47,800 $ 239,000
Cost of goods sold 73,800 43,800 30,200 147,800
Gross profit on sales $ 45,700 $ 27,900 $ 17,600 $ 91,200
Operating expenses      
Direct Expenses        
Salaries Expense $ 15,600 $ 7,000 $ 7,800 $ 30,400
Depreciation Expense 400 100 200 700
Supplies Expense 300 200 100 600
Total Direct Expenses 16,300 7,300 8,100 31,700

Continued….

22-18
 Departmental Contribution to OH

         

Departmental Contributions        
To Overhead 29,400 20,600 9,500 59,500
Indirect Expenses:
Rent Expense       10,800
Utilities Expense       1,800
Advertising Expense       1,000
Insurance Expense       1,900
Share of general office expense     15,300
Share of purchasing expenses     9,700
Total operating expenses       $ 40,500
Net income       $ 19,000
Contribution as percent of sales 24.6% 28.7% 19.9% 24.9%

22-19
Methods of Allocating Support
Costs to Production Departments

1. Direct
2. Step-Down
3. Reciprocal
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
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
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
Choosing Between Methods
 Reciprocal is the most precise
 Direct and Step-Down are simple to
compute and understand
 Direct Method is widely used