CHAPTER15AllocationofSupportDepartmentCosts,CommonCosts,andRevenues

Chapter15learningobjectivesDistinguishthesingle-ratemethodfromthedual-ratemethodUnderstandhowthechoicebetweenallocationbasedonbudgetedandactualratesandbetweenbudgetedandactualusagecanaffecttheincentivesofdivisionmanagersAllocatemultiplesupporting-departmentcostsusingthedirectmethod,thestep-downmethodandthereciprocalmethod15-2

Chapter15learningobjectives,concludedAllocatecommoncostsusingthestand-alonemethodandtheincrementalmethodExplaintheimportanceofexplicitagreementbetweencontractingpartieswhenthereimbursementamountisbasedoncostsincurredUnderstandhowbundlingofproductscausesrevenueallocationissuesandthemethodsmanagersusetoallocaterevenues15-3

AllocatingCostsofaSupportingDepartmenttoOperatingDepartmentsHowacompanyallocatesitsoverheadandinternalsupportcosts–costsrelatedtomarketing,advertisingandotherinternalservices–amongitsvariousproductiondepartmentsorprojectscanhaveabigimpactonhowprofitablethosedepartmentsorprojectsare.Operating(production)department—directlyaddsvaluetoaproductorservice.Support(service)department—providestheservicesthatassistotherinternaldepartments(operatingdepartmentsandothersupportdepartments)inthecompany.15-4

AllocatingCostsofaSupportingDepartmenttoOperatingDepartments,concludedManagersfacetwoquestionswhenallocatingthecostsofasupportdepartmenttooperatingdepartmentsordivisions:Shouldfixedcostsofasupportdepartmentsbeallocatedtooperatingdivisions?Iffixedcostsareallocated,shouldvariableandfixedcostsofthesupportdepartmentbeallocatedinthesameway?15-5

TwoMethodstoAllocate

SupportDepartmentCosts:singlerateSingle-ratemethod—doesnotdistinguishbetweenfixedandvariablecosts.Itallocatescostsineachcostpoolusingthesamerateperunitofa