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Unformatted text preview: CHAPTER 15 ALLOCATION OF SUPPORT-DEPARTMENT COSTS, COMMON COSTS, AND REVENUES 15-1 The single-rate (cost-allocation) method makes no distinction between fixed costs and variable costs in the cost pool. It allocates costs in each cost pool to cost objects using the same rate per unit of the single allocation base. The dual-rate (cost-allocation) method classifies costs in each cost pool into two poolsa variable-cost pool and a fixed-cost poolwith each pool using a different cost-allocation base. 15.2 The dual-rate method provides information to division managers about cost behavior. Knowing how fixed costs and variable costs behave differently is useful in decision making. 15.3 Budgeted cost rates motivate the manager of the supplier department to improve efficiency because the supplier department bears the risk of any unfavorable cost variances. 15-5 The use of budgeted indirect cost allocation rates rather than actual indirect rates has several attractive features to the manager of a user department: a. the user knows the costs in advance and can factor them into ongoing operating choices, b. the cost allocated to a particular user department does not depend on the amount of resources used by other user departments, and c. inefficiencies at the department providing the service do not affect the costs allocated to the user department. 15-7 The three methods differ in how they recognize reciprocal services among support departments: a. The direct (allocation) method ignores any services rendered by one support department to another; it allocates each support departments costs directly to the operating departments. b. The step-down (allocation) method allocates support-department costs to other support departments and to operating departments in a sequential manner that partially recognizes the mutual services provided among all support departments. c. The reciprocal (allocation) method allocates support-department costs to operating departments by fully recognizing the mutual services provided among all support departments. 15-8 The reciprocal method is theoretically the most defensible method because it fully recognizes the mutual services provided among all departments, irrespective of whether those departments are operating or support departments. 15-9 The stand-alone cost-allocation method uses information pertaining to each user of a cost object as a separate entity to determine the cost-allocation weights. The incremental cost-allocation method ranks the individual users of a cost object in the order of users most responsible for the common costs and then uses this ranking to allocate costs among those users. The first-ranked user of the cost object is the primary user and is allocated costs up to the costs of the primary user as a stand-alone user. The second-ranked user is the first incremental user and is allocated the additional cost that arises from two users instead of only the 15-1 primary user. The third-ranked user is the second incremental user and is allocated the additional primary user....
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