Cost Accounting Systems

Dr. Shorouk Esam El-Din Yassien

Lecturer at Accounting
Department (English Section),
Faculty of Commerce, Benha University

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 15-1
CHAPTER 15

Allocation of
Support Department Costs,
Common Costs,
and Revenues
 Methods of Allocating Support Costs
to Production Departments
1. Direct
2. Step-Down
3. Reciprocal

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 15-3
 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. 15-4
 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. 15-5
 DATA USED IN COST ALLOCATION
EXAMPLES

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 15-6
 DIRECT ALLOCATION METHOD
EXAMPLE

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 15-7
 DIRECT ALLOCATION METHOD
ILLUSTRATED

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
 DATA USED IN COST ALLOCATION EXAMPLES

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 15-11
 STEP-DOWN ALLOCATION METHOD
EXAMPLE

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 15-12
 STEP-DOWN ALLOCATION METHOD
ILLUSTRATED

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 15-13
 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. 15-14
 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. 15-15
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 15-16
 RECIPROCAL ALLOCATION METHOD (REPEATED ITERATIONS) EXAMPLE

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 15-17
◼ Linear equation
◼ E=300000+0.1 M (1)
◼ M=264000+0.3E (2)
◼ E=300000+0.1 (264000+0.3E)
◼ E=300000+26400+0.03E
◼ E=326400+0.03E----------
◼ 1E-0.03E=0.97 E
◼ 0.97E=326400
◼ E=336494.8 ---336495
◼ Substituting this into equation 2,
◼ M=264000+(0.3*336495)=264000+100948.5=364948.5
◼ ……364949
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 15-18
 Support department Production department

Engineering Material Machine Assembly Total

dep managemen dep dep
t dep

300000 264000 329000 227000 1120000

Allocation (336495) 100949 168247 67299

of Eng

Allocation 36495 (364949) 72990 255464

of Mat Mngt
0 0 570237 549763 1120000

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 15-19
 ◼ MM=336495*0.30=100949
◼ MD=336495*0.50=168247
◼ AD=336495*0.20=67299
◼ E=364949*0.10=36495
◼ MD=364949*0.20=72990
◼ AD=364949*0.70=255464

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 15-20
 Choosing Between Methods
◼ Reciprocal is the most precise
◼ Direct and Step-Down are simple to compute
and understand
◼ Direct Method is widely used

To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 15-21