University:
California State University, Northridge
Course:
ACCT 230 | Introduction to Managerial Accounting
Academic year:

2024
Views:

184

Pages:

13
Author:

Joaquin Spears

Chapter 5: Job-Order Costing Part 4 6 Producing and Supporting Departments ► Nearly every company or factory has producing departments and support departments. ► Producing departments are directly responsible for creating the products or services sold to customers. ►For example, a public accounting firm might have producing departments devoted to auditing, tax, and management advisory services. ►In a factory, producing departments are those that work directly on the products being manufactured, such as the grinding and assembly departments. ► Support departments provide essential services for producing departments, but they do not actually make the product or service being sold. ►Examples include the maintenance, grounds, engineering, housekeeping, personnel, and photocopying departments. Steps for Determining Product Costs by Using 6 Predetermined Departmental Overhead Rates ► Once the direct overhead costs of each department are determined, the next step is to assign the support department costs to producing departments using causal factors (drivers). 6 Assigning Costs of Multiple Support Departments ►The three methods of assigning costs of multiple support departments to producing departments are: ►the direct method, ►the sequential method, and ►the reciprocal method. ►In determining which support department cost allocation method to use, companies must determine the extent of support department interaction and weigh the individual costs and benefits of each method. Assigning Costs of Multiple Support 6 Departments Using the Direct Method 6 Cornerstone 5-6 Assigning Support Department Costs by Using the Direct Method 6 Cornerstone 5-6 Assigning Support Department Costs by Using the Direct Method (continued) 6 Assigning Costs of Multiple Support Departments Using the Sequential Method ► The sequential (or step) method of allocation recognizes that interactions among support departments occur. ► However, the sequential method does not fully account for support department interaction. ► Cost allocations are performed in a step-down fashion, following a predetermined ranking procedure. ► Usually, the sequence is defined by ranking the support departments in order of the amount of service rendered, from the greatest to the least, where degree of service is measured by the direct costs of each support department. 6 Assigning Costs of Multiple Support Departments Using the Sequential Method (continued) 6 Cornerstone 5-7 Assigning Support Department Costs by Using the Sequential Method 6 Cornerstone 5-7 Assigning Support Department Costs by Using the Sequential Method (continued) 6 The Reciprocal Method ► The reciprocal method of allocation recognizes all interactions among support departments. ► Under the reciprocal method, one support department’s use by another figures in determining the total cost of each support department, where the total cost reflects interactions among the support departments. ► Then, the new total of support department costs is allocated to the producing departments. ► This method fully accounts for support department interaction by using a system of simultaneous linear equations. ► The reciprocal method is not widely used due to its complexity. 6 Technology and Support Department Cost Allocation ►Another factor in allocating support department cost is the rapid change in technology. ►Many firms currently find that support department cost allocation is useful for them. However, the move toward activity-based costing and just-in-time manufacturing can virtually eliminate the need for support department cost allocation.