CHAPTER 13 Flashcards
Why allocate service department costs
o Fairly assign costs, although allocating costs may not help to enable better management decisions they do allocate the costs to develop division, department, or other product cost information.
Allocating costs also helps to
- define costs in the case of contract disputes
- Highlighting misleading cost allocations
•Use for managerial purposes
•Charging the cost of service departments to
other users
• Preventing users from treating services as free
Direct method
The easiest method to use.
o Accountants ignore work done by service depts. for other service departments
Step method
o Allocates costs in steps
• Start with the service department that receives the smallest dollar amount of service from the other service departments and allocate its cots to the other service and production departments
• Next, distribute the total costs the total costs of the service department receiving the nest smallest amount of service from the other service departments until all service department costs are allocated to the production departments
Allocation of joint costs- NRV
o Net Realizable Value (Better)- Selling prices of ‘a’ versus ‘b’
- Fairest to use
- Allocates joint process costs based on the NRV of each product at the split off point. The NRV is the estimated sales value of each product at the split off point
Allocation of joint costs- Physical Quantities Method
oPhysical Quantities Method
• Allocates joint process cost based on a physical measure of volume, weight, or any other common measure of physical characteristics.
• Use when output product prices are volatile or when significant processing occurs between the split off point and the first point of marketability
o Also use when product prices are not set by the market- ex- w/ regulated companies
