CHAPTER 15
Allocation of
Support Department Costs,
Common Costs,
and Revenues
Allocating Costs of a Supporting
Department to Operating Departments
 Supporting (Service) Department – provides
the services that assist other internal
departments in the company
 Operating (Production) Department – directly
adds value to a product or service
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
15-2
Methods to Allocate
Support Department Costs
 Single-Rate Method – allocates costs in each
cost pool (service department) to cost objects
(production departments) using the same rate
per unit of a single allocation base

No distinction is made between fixed and
variable costs in this method
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
15-3
Methods to Allocate
Support Department Costs
 Dual-Rate Method – segregates costs within
each cost pool into two segments: a variablecost pool and a fixed-cost pool.
 Each pool uses a different cost-allocation
base
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
15-4
Allocation Bases

Under either method, allocation of support costs
can be based on one of the three following
scenarios:
1.
2.
3.

Budgeted overhead rate and budgeted hours
Budgeted overhead rate and actual hours
Actual overhead rate and actual hours
Choosing between actual and budgeted rates:
budgeted is known at the beginning of the period,
while actual will not be known with certainty until
the end of the period
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
15-5
Methods of Allocating Support Costs
to Production Departments
Direct
2. Step-Down
3. Reciprocal
1.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
15-6
Direct Method
 Allocates support costs only to Operating
Departments
 No interaction between Support Departments
prior to allocation
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
15-7
Direct Method
Support Departments
Production Departments
Information Systems
Manufacturing
Packaging
Accounting
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
15-8
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
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
15-9
Step-Down Method
Support Departments
Production Departments
Information Systems
Manufacturing
Packaging
Accounting
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
15-10
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
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
15-11
Reciprocal Method
Support Departments
Production Departments
Information Systems
Manufacturing
Packaging
Accounting
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
15-12
Allocating Common Costs
 Common Cost – the cost of operating a
facility, activity, or like cost object that is
shared by two or more users at a lower cost
than the individual cost of the activity to each
user
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
15-13
Methods of Allocating
Common Costs
 Stand-Alone Cost-Allocation Method – uses
information pertaining to each user of a cost
object as a separate entity to determine the
cost-allocation weights
 Incremental Cost-Allocation Method – ranks
the individual users of a common cost object
in the order of users most responsible for the
common cost and then uses this ranking to
allocate cost among those users.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
15-14
Revenue Allocation and
Bundled Products
 Revenue Allocation occurs when revenues are
related to a particular revenue object but cannot be
traced to it in an economically feasible manner
 Revenue Object – anything for which a separate
measurement of revenue is desired
 Bundled Product – a package of two or more
products or services that are sold for single price, but
individual components of the bundle also may be sold
as separate items at their own “stand-alone” prices
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
15-15
CHAPTER 15
THE END