11CHAPTER 4B2Support Departments3• Refinement on Departmental Allocation of MO/H• Two Types of Departments–Production Departments (PD)–Support Departments (SD)24• PDs: –Manufacturing industries•Examples–Service industries•Examples5• SDs–Examples• Manufacturing• Service6• SDs–Part of MO/H –SD Costs allocated to PDs–SD Costs added to PD’s own O/H37Eg: Law Firm Departments–Corporate–Litigation–Word Processing (WP)8• Allocate WP cost by hours –Corporate 60%–Litigation 40%9With >1 SD3 Methods to Allocate SD Costs410• Eg: Law Firm now has 2 SDs–Word Processing (WP)–Recruiting (R)1112• 3 methods to allocate SD costs –Direct Method–Step-Down Method–Reciprocal Method513Direct Method14Corporate LitigationWP$200,00060(100 x $200K)$120,00040(100 x $200K)$80,000R:$200,000( 50(100 x $200K)$100,00050(100 x $200K)$100,000$220,000 $180,00015Step-Down Method61617Recruiting Corporate LitigationWP:$200K10(110x$200K)$18,18260(110 x $200K)$109,09140(110 x $200K)$72,727R: $218,182_______50(100 x $218,182)$109,09150(100x $218,182)$109,091$18,182 $218,182 $181,81818• Order of SD allocation– Most authorities greatest %719• WP goes 1st(WP%>R%)–WP R 9.09% (10/110)–R WP 4.76% (5/105) 20• If using % to decide order:–S3 goes 1st–S2 goes 2ndDepartments Receiving AllocationSD: S1 S2 S3 P1 P2 TotalS1 -- 20% 20% 30% 30% 100%S2 25% -- 5% 40% 30%100%S3 25% 25% -- 30% 20%100%21Reciprocal Method822Reciprocal Method:• Solve for total allocations of SDs:R = 200,000 + (10/110) x WPWP = 200,000 + (5/105) R23• Use Substitution MethodR = 200,000 + (10/110) x WPR =200,000 + (10/110) x [200,000 + ([5/105] x R)]24R = 200,000 + 18,181.8 + .00433RR = 218,181.8 + .004329RR - .004329R = 218,181.8.995671R = 218,181.8R = 218,181.8/.995671R = $219,130.42925WP = 200,000 + (5/105) x RWP = 200,000 + (5/105) x 219,130.42WP = 200,000 + 10,434.78WP = $210,434.782627WP R Corporate LitigationWP $210,434.78X10(110 x $210,434.78)$19,130.4360(110 x $210,434)$114,782.6140(110 x $210,434)$76,521.74R$219,130.425(105 x $219,130.42)$10,434.78 X50(105 x $219,130)$104,347.8250(105 x $219,130)$104,347.82$10,434.78 $19,130.43 $219,130.43 $180,869.561028SD Costs = Allocations to PDsWP + R = Corporate + Litigation$200,000 + $200,000 = $219,130.43 + $180,869.56$400,000 = $399,999.99Did we give away all of the SD Costs to the
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