Activity-based Costing and Service Department Cost Allocations

Prepared by: Brian Christian S. Villaluz, CPA Service Department Cost Allocations Two types of overhead costs:  !irectly related to the operatin" activities # primary revenue – generating$ % &ndirectly related to the operatin" activities Support departments ' include both service and ad(inistrative depart(ents. o Service department ' an or"anizational unit that perfor(s functional tas)s for other internal units. o Administrative department ' perfor( (ana"e(ent activities that bene*t the entire or"anization. METHODS OF ALLOCATING SERICE DE!ARTMENT COSTS  Direct met"od ' assi"ns support depart(ent costs only to producin" depart(ents. + the si(plest allocation (ethod. + o consideration is "iven to service perfor(ed by one service depart(ent for another service depart(ent.

Service !ept.  Producin" !ept. 

Service !ept. % Producin" !ept. %

%

Step met"od ' allows a partial reco"nition of the e-ects of interaction a(on" support depart(ents. + o cost is assi"ned to service depart(ents whose costs have already been allocated.

Service !ept.  Producin" !ept. 

Service !ept. % Producin" !ept. %

#ene$ts%provided ran&in' ' be"ins with the support depart(ent providin" the (ost service to all other support areas and ends with the support depart(ent providin" the least service to all other support areas. o Those of the service depart(ent that provides the hi"hest percenta"e of its total services to other service depart(ents. o Another is to be"in with the costs of the service depart(ent providin" services to the "reatest nu(ber of other service depart(ents. o Another is to be"in with the service depart(ent havin" the "reatest peso cost of services provided to other service depart(ents. 

Al'e(raic met"od ' considers all depart(ental interrelationships and re/ects these relationships in si(ultaneous e0uations.

Prepared by: Brian Christian S. Villaluz, CPA +

Service !ept.  Producin" !ept. 

Service !ept. % Producin" !ept. %

the (ost co(ple1 of all the allocation techni0ues but it is the (ost theoretically correct and provides the (ost accurate and reliable allocations.

Prepared by: Brian Christian S. Villaluz, CPA

ACTIVITY-BASED COSTING (ABC) Problem 1: Weng Office Equipment Corporation manufactures two types of filing cabinets – Deluxe and Executive – and applies manufacturing overhead to all units at the rate of P! per machine hour" Production information follows# Deluxe: Executie: Directmaterialcost P$! P%& Directlaborcost '& '& (udgeted volume )units* +%,!!! -!,!!!

.he controller, who is studying the use of activity/based costing, has determined that the firm0s overhead can be identified with three activities# manufacturing setups, machine processing, and product shipping" Data on the number of setups, machine hours, and outgoing shipments, which are the activities0 three respective cost drivers, follow# Deluxe: +!! -',!!!

1etups 2achinehours Outgoingshipments

'!!

Executie: %! $&,!!!

+&!

TOTA!: +%! 33,!!!

-&!

.he firm0s total overhead is subdivided as follows# manufacturing setups, P+,-$$,!!!4 machine processing, P-,%5%,!!!4 and product shipping, P+,+'!,!!!" 1" " ." "

2"

Com#ute t$e u%it m &%u'&cturi% cot o' Delu xe &%* Exe cutie 'ili% c&bi%et b+ ui% t$e c om#&%+, curre%t oer$e&* coti% #roce*ure" Com#ute t$e u%it m&% u'&cturi% cot o' Deluxe &% * Executie 'ili% c &bi%et b+ ui% &ct iit+-b&e* coti%" I t$e cot o ' t$e Deluxe 'i li% c&bi% et oert&te* or u %*ert&te* (i"e" *ito rte*) b+ t $e ue o' m&c$ i%e $our to &lloc&te tot&l m&%u'&cturi% oer$e&* to #ro*uctio%/ B+ $o0 muc$/ C&lcul&te t$e & re&te &mou%t b + 0$ic$ t$e De luxe c&bi%et li%e i u% *ercote* b+ t $e com#&%+, curre%t tr&*itio%&l oer$e&* coti% #roce*ure" T$e% c&lcul&te t$e &re&te &mou%t b+ 0$ic$ t$e tr&*itio%&l +tem oercot t$e Executie c&bi%et li%e" Aume t$&t t$e cu rre%t elli%  #rice o' & Deluxe 'i li% c&bi%et i P 34 &%* t$e m &r5eti% m&%&er i co%tem#l&ti% & P.4 *icou%t to timul&te olume" I t$i *icou%t &*i&ble/

Problem : .he following data are for the two products produced by 6plan Company#

Directmaterials Direct labor hours )D89* 2achinehours)29* (atches :olume Engineering modifications ;umber of customers 2ar