ac 505 chapter 4 power point slides

8/3/2019 AC 505 Chapter 4 Power Point Slides

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McGraw-Hill/Irwin Slide 1

TCO F - Given appropriate financial data, compare and contrast job order andprocess costing systems (1) to value ending inventory and costs of goods sold for amanufacturing company and/or (2) to determine the cost of services rendered in aservice organization.

Key Concepts:Understand job order and process costing methods to value ending inventory andcosts of goods sold.Demonstrate the steps used to prepare a production report under FIFO and W/Acosting methods.Using given data, determine ending inventory and costs of goods sold for amanufacturing organization.Using given data, determine the cost of services rendered for a serviceorganization

Week 2


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2010 The McGraw-Hill Companies, Inc.

Systems Design: Process Costing

Chapter 4Managers need to assign costs to products to facilitate external financialreporting and internal decision making. This chapter illustrates anabsorption costing approach to calculating product costs known asprocess costing.


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Similarities Between Job-Order and ProcessCosting

Both systems assign material, labor and overheadcosts to products and they provide a mechanismfor computing unit product costs.

Both systems use the same manufacturingaccounts, including Manufacturing Overhead, RawMaterials, Work in Process, and Finished Goods.

The flow of costs through the manufacturingaccounts is basically the same in both systems.


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Differences Between Job-Order and ProcessCosting

Process costing is used when a single product isproduced on a continuing basis or for a long periodof time. Job-order costing is used when manydifferent jobs having different production

requirements are worked on each period.

Process costing systems accumulate costs bydepartment. Job-order costing systems accumulated

costs by individual jobs. Process costing systems compute unit costs by

department. Job-order costing systems compute unitcosts by job on the job cost sheet.


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Process costing is used for productsthat are:

a. Different and produced continuously.b. Similar and produced continuously.

c. Individual units produced to customerspecifications.

d. Purchased from vendors.

Quick Check


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Process costing is used for productsthat are:

a. Different and produced continuously.b. Similar and produced continuously.

c. Individual units produced to customerspecifications.

d. Purchased from vendors.

Quick Check


7/117McGraw-Hill/Irwin Slide 7

Processing Departments

Any unit in an organization where materials, laboror overhead are added to the product.

The activities performed in a processing

department are performed uniformlyon allunits of production. Furthermore, the output ofa processing department must be homogeneous.

Products in a process costing environment

typically flow in a sequence from one departmentto another.



Learning Objective 1

Record the flow ofmaterials, labor, and

overhead through aprocess costing system.



Comparing Job-Order and Process Costing

Finished

Goods

Cost of

GoodsSold

Work inProcess

DirectMaterials

Direct Labor

Manufacturing

Overhead

Direct materials, direct labor andmanufacturing overhead are added to Work inProcess. When work in process is completed,the costs are transferred to Finished Goods.When finished goods are sold, the costs aretransferred to Cost of Goods Sold.




FinishedGoods

Cost ofGoodsSold

Direct Labor

ManufacturingOverhead

Jobs

Costs are traced andapplied to individualjobs in a job-order

cost system.

DirectMaterials

There is a key fundamental difference between process and job-ordercosting systems. Job-order costing systems trace and apply

manufacturing costs to jobs. One Work in Process account is oftenused to accumulate costs for all jobs. The individual job cost sheetsserve as a subsidiary ledger.




FinishedGoods

Cost ofGoodsSold

Direct Labor


ProcessingDepartment

Costs are traced andapplied to departments

in a process costsystem.

DirectMaterials

In some companies there may be several processing departments that goods must pass through tobecome finished goods. A separate Work in Process account is maintained for each processingdepartment. Material, labor and overhead costs transferred from one departments Work in Process

account to another departments Work in Process account are called transferred-in costs.


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Raw Materials

Process Cost Flows: The Flow of RawMaterials (in T-account form)

Work in ProcessDepartment B

Work in ProcessDepartment A

DirectMaterials

DirectMaterials

DirectMaterials

Direct materials can be requisitioned for use in both DepartmentA and Department B. These direct materials are likely to bedifferent in nature. Direct material costs are debited to the

appropriate departmental Work in Process account dependingupon where the materials were added to the production process.

The Raw Materials Inventory account is credited for thecorresponding amounts.


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Process Cost Flows: The Flow of LaborCosts (in T-account form)


Work in ProcessDepartment ASalaries andWages Payable

DirectMaterials

DirectMaterials

DirectLabor

DirectLabor Direct

Labor

Direct labor is transferred from the Salaries and Wages Payableaccount into the work in process account of Departments A and Bdepending upon where the individual employee worked. Directlabor costs are debited to the appropriate departmental Work inProcess account depending upon where the labor was added to theproduction process. Salaries and Wages Payable is credited for thecorresponding amounts.



Process Costing: The Flow of Labor Costs(in journal entry form)

GENERAL JOURNAL Page 4

Date Description

Post.

Ref. Debit Credit

Work in Process - Department A XXXXX

Work in Process - Department B XXXXX

Salaries and Wages Payable XXXXX

To record direct labor costs.



Process Cost Flows: The Flow of ManufacturingOverhead Costs (in T-account form)


Work in Process

Department A


Overhead

Applied toWork inProcess

AppliedOverhead

AppliedOverhead

DirectLabor

DirectMaterials

DirectLabor

DirectMaterials

Actual

Overhead

Manufacturing overhead is applied to eachprocessing department based on a predeterminedrate for each department. The predetermined rate

does not have to be based on the same cost driverfor each processing department. Manufacturing

overhead costs are debited to the respectivedepartmental Work in Process accounts.

Manufacturing overhead is credited by thecorresponding amounts.




Date Description

Post.

Ref. Debit Credit

Work in Process - Department A XXXXXWork in Process - Department B XXXXX

Manufacturing Overhead XXXXX

To apply overhead to departments.

Process Cost Flows: The Flow of ManufacturingOverhead Costs (in journal entry form)



Process Cost Flows: Transfers fromWIP-Dept. A to WIP-Dept. B (in T-account form)


Work in ProcessDepartment A

DirectMaterialsDirectLabor

AppliedOverhead

DirectMaterials

DirectLaborApplied

Overhead

Transferredto Dept. B

Transferredfrom Dept. A

DepartmentA

DepartmentB

The cost of units complete as to processing in Department A aretransferred into Department B for additional work. Department B

has incurred additional costs to work on units that were in processat the beginning of the period. The transferred-in costs from

Department A are added to the manufacturing costs incurred inDepartment B.




Date Description

Post.

Ref. Debit Credit

Work in Process - Department B XXXXXWork in Process - Department A XXXXX

To record the transfer of goods from

Department A to Department B.

Process Cost Flows: Transfers from WIP-Dept.A to WIP-Dept. B (in journal entry form)



Finished Goods

Process Cost Flows: Transfers from WIP-Dept.B to Finished Goods (in T-account form)


Cost of

GoodsManufactured

DirectMaterialsDirectLabor

AppliedOverhead

Transferred

from Dept. A

Cost of

GoodsManufactured

The transfer of completed goods fromWork in Process Department B intoFinished Goods Inventory. The costs

transferred represent the cost of goodmanufactured.




Date Description

Post.

Ref. Debit Credit

Finished Goods XXXXX

Work in Process - Department B XXXXX

To record the completion of goods

and their transfer from Department B

to finished goods inventory.

Process Cost Flows: Transfers from WIP-Dept.B to Finished Goods (in journal entry form)


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Finished Goods

Cost of Goods Sold

Process Cost Flows: Transfers from FinishedGoods to COGS (in T-account form)


Cost ofGoods

Manufactured

DirectMaterialsDirect

LaborApplied

OverheadTransferredfrom Dept. A

Cost ofGoodsSold

Cost ofGoodsSold

Cost ofGoods

Manufactured

Once we sell finished goods, we debit Cost ofGoods Sold and credit Finished Goods Inventory.


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Date Description

Post.

Ref. Debit Credit

Cost of Goods Sold XXXXX

Finished Goods XXXXX

To record the transfer of finished

goods inventory to cost of goods

sold.

Process Cost Flows: Transfers from FinishedGoods to COGS (in journal entry form)


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Equivalent Units of Production

Equivalent units are the product of the number ofpartially completed units and the percentagecompletion of those units.

We need to calculate equivalent units because adepartment usually has some partially completed units

in its beginning and ending inventory. These partiallycompleted units complicate the determination of a

departments output for a given period and the unit cost

that should be assigned to that output.


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Equivalent Units The Basic Idea

Two half completed products areequivalent toone complete product.

So, 10,000 units 70% completeare equivalent to7,000 complete units.

+ = 1


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For the current period, Jones started 15,000units and completed 10,000 units, leaving 5,000units in process 30 percent complete. Howmany equivalent units of production did Joneshave for the period?

a. 10,000

b. 11,500

c. 13,500

d. 15,000

Quick Check


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For the current period, Jones started 15,000units and completed 10,000 units, leaving 5,000units in process 30 percent complete. Howmany equivalent units of production did Joneshave for the period?

a. 10,000

b. 11,500

c. 13,500

d. 15,000

10,000 units + (5,000 units 0.30)= 11,500 equivalent units

Quick Check


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Calculating Equivalent Units

Equivalent units can be calculatedtwo ways:

The First-In, First-Out MethodFIFO iscovered in the appendix to this chapter.

The Weighted-Average MethodThis method

will be covered in the main portion of the chapter.


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Compute the equivalentunits of production using

the weighted-averagemethod.


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Equivalent Units of ProductionWeighted-Average Method

The weighted-average method . . .1. Makes no distinction between work done in prior

or current periods.

2. Blends together units and costs from prior andcurrent periods.

3. Determines equivalent units of production for a

department by adding together the number ofunits transferred out plus the equivalent units inending Work in Process Inventory.


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Treatment of Direct Labor

Direct labor costsmay be small

in comparison toother product

costs in processcost systems.

DirectMaterials

Type of Product Cost

DollarAmount

DirectLabor

Manufacturing

Overhead

In todays economy, direct labor costs

are becoming small when compared tomaterials and overhead costs.

Automation is one of the causes for thisshift.


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Treatment of Direct Labor

Type of Product Cost

D

ollarAmou

nt Conversion

Direct labor andmanufacturing

overhead may becombined into

one classificationof product

cost calledconversion costs.

DirectMaterials

DirectLabor

DirectLabor


As a consequence of the change in volume of direct laborcosts, many companies combine labor and overhead costsand refer to the total as conversion costs. That is, these are

the costs incurred to convert the direct materials into afinished good.


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Weighted-Average An Example

Smith Company reported the following activity inthe Assembly Department for the month of June:

Percent Completed

Units Materials ConversionWork in process, June 1 300 40% 20%

Units started into production in June 6,000

Units completed and transferred out 5,400of Department A during June

Work in process, June 30 900 60% 30%


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The first step in calculating the equivalent units is toidentify the units completed and transferred out of

Assembly Department in June (5,400 units)


Materials Conversion

Units completed and transferred

out of the Department in June 5,400 5,400


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The second step is to identify the equivalent unitsof

production in ending work in processwith respect tomaterialsfor the month (540 units) and adding this to the

5,400 units from step one.





Work in process, June 30:

900 units 60% 540

Equivalent units of Production in

the Department during June 5,940


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900 units 60% 540

900 units 30% 270


the Department during June 5,940 5,670

The third step is to identify the equivalent unitsof production inending work in processwith respect to conversionfor the month

(270 units) and adding this to the 5,400 units from step one.


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900 units 60% 540

900 units 30% 270


the Department during June 5,940 5,670

Equivalent units of production alwaysequals:


+ Equivalent units remaining in work in process



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BeginningWork in Process

300 Units40% Complete

EndingWork in Process


6,000 Units Started

5,400 Units Completed

5,100 Units Startedand Completed


Materials

5,400 Units Completed540 Equivalent Units 900 60%

5,940 Equivalent unitsof production


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6,000 Units Started

5,400 Units Completed

5,100 Units Started

and Completed

270 Equivalent Units900 30%



300 Units20%Complete


900 Units30%Complete


Conversion


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Compute the cost perequivalent unit using the

weighted-average method.


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Beginning Work in Process Inventory: 400 unitsMaterials: 40% complete $ 6,119Conversion: 20% complete $ 3,920

Production started during June 6,000 unitsProduction completed during June 5,400 units

Costs added to production in JuneMaterials cost $ 118,621Conversion cost $ 81,130

Ending Work in Process Inventory: 900 unitsMaterials: 60% completeConversion: 30% complete

Compute and Apply Costs


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The formula for computing the cost perequivalent unit is:

Cost perequivalent

unit=

Cost of beginning

Work in ProcessInventory

Cost added duringthe period

Equivalent units of production

+


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Here is a schedule with the cost and equivalentunit information.


Total

Cost Materials Conversion

Cost to be accounted for:

Work in process, June 1 10,039$ 6,119$ 3,920$

Cost added in Assembly 199,751 118,621 81,130

Total cost 209,790$ 124,740$ 85,050$

Equivalent units 5,940 5,670


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Total

Cost Materials ConversionCost to be accounted for:

Work in process, June 1 10,039$ 6,119$ 3,920$

Cost added in Assembly 199,751 118,621 81,130

Total cost 209,790$ 124,740$ 85,050$

Equivalent units 5,940 5,670

Cost per equivalent unit 21.00$ 15.00$


Here is a schedule with the cost and equivalentunit information.

$124,740 5,940 units = $21.00 $85,050 5,670 units = $15.00

Cost per equivalent unit = $21.00 + $15.00 = $36.00


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Assign costs to units usingthe weighted-average

method.


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Applying Costs

Materials Conversion Total

Ending WIP inventory:

Equivalent units 540 270

Assembly DepartmentCost of Ending WIP Inventory and Units Transferred Out


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Applying Costs







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Applying Costs




Cost per equivalent unit 21.00$ 15.00$Cost of Ending WIP inventory 11,340$ 4,050$ 15,390$



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Computing the Cost of Units Transferred Out





Units completed and transferred out:

Units transferred 5,400 5,400



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Computing the Cost of Units Transferred Out





Units completed and transferred out:

Units transferred 5,400 5,400


Cost of units transferred out 113,400$ 81,000$ 194,400$



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Prepare a costreconciliation report.


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Reconciling Costs

Costs to be accounted for:

Cost of beginning Work in Process Inventory 10,039$

Costs added to production during the period 199,751

Total cost to be accounted for 209,790$

Assembly DepartmentCost Reconciliation

Reconcile the costs. The first step is to record the cost ofbeginning Work in Process Inventory of $10,039. The second step

is to record the costs added to production during the period asshown of $199,751. The third step is to sum these two costs for a

total to be accounted for of $209,790.

Computing the costs accounted for: The first step is to record thei l d f di W k i P I


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Reconciling Costs



Costs added to production during the period 199,751

Total cost to be accounted for 209,790$

Cost accounted for as follows:

Cost of ending Work in Process Inventory 15,390$

Cost of units transferred out 194,400Total cost accounted for 209,790$

Assembly DepartmentCost Reconciliation

previously computed cost of ending Work in Process Inventory$15,390. The second step is to record the previously computedcost of units transferred out $194,400. The third step is to sumthese two costs for a total of $209,790. Notice the two totals agreeindicating that all costs have been accounted for.


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Operation Costing

Operation cost is a hybrid of job-order andprocess costing because it possesses attributes

of both approaches

Operation costing iscommonly used when

batches of many differentproducts pass through the

same processingdepartment.

Operation costing is similar to job-order costing. For example,a shoe manufacturer may charge each batch of shoes for itsown specific material costs (e.g., shoes made with expensiveleather would be charged accordingly, as would shoes made

with inexpensive synthetic materials). It is also similar toprocess costing, the shoe manufacturer may accumulate thelabor and overhead costs by department and assign the sameconversion cost per unit to each shoe regardless of the shoe

style


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FIFO Method

Appendix 4A


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FIFO vs. Weighted-Average Method

The FIFO method (generally considered moreaccurate than the weighted-average method)differs from the weighted-average method in

two ways:

1. The computation of equivalent units.

2. The way in which the costs of beginning

inventory are treated.


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Compute the equivalentunits of production using

the FIFO method.


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Equivalent Units FIFO Method

Lets revisit the Smith Company example. Here isinformation concerning the Assembly Departmentfor the month of June.

Percent Completed

Units Materials Conversion


Units started into production in June 6,000

Units completed and transferred out 5,400of Department A during June



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Step 1: Determine equivalent units needed to completebeginning Work in Process Inventory.


To complete beginning Work in Process:

Materials: 300 units (100% - 40%) 180

Conversion: 300 units (100% - 20%) 240

The first step in the accounting process is to determine the equivalent units needed to complete beginning Work inProcess Inventory (180 units for materials and 240 units for conversion). Recall that the units in beginning inventorywere 40% complete as to materials, so we must have to add 60% of the materials this month to complete the units.

As to conversion costs, the units in beginning inventory were 20% complete so we must incur 80% of the conversioncosts this month to complete the units.


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Step 2: Determine units started and completedduringthe period.



Materials: 300 units (100% - 40%) 180


Units started and completed during June 5,100 5,100

The 5,100 units represent the total units completed and transferred out this month (5,400 units)less those units in beginning inventory (300). Remember, in FIFO we must keep track of the units

in beginning inventory, started this month, and ending inventory separately. The first units ininventory, beginning inventory, are the first units transferred out this month.


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Step 3: Add the equivalent units in ending Work inProcess Inventory.



Materials: 300 units (100% - 40%) 180


Units started and completed during June 5,100 5,100

Ending Work in Process

Materials: 900 units 60% complete 540

Conversion: 900 units 30% complete 270

Equivalent units of production 5,820 5,610


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6,000 Units Started

5,100 Units Started

and Completed

FIFO Example

Materials

5,100 Units Completed540 Equivalent Units

900 60%




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6,000 Units Started

5,100 Units Started

and Completed

FIFO Example

Conversion

5,100 Units Completed270 Equivalent Units

900 30%



Equivalent Units: Weighted-Average vs.


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q g gFIFO


Equivalent units - weighted-average method 5,940 5,670

Less equivalent units in beginning inventory:

300 units 40% 120

300 units 20% 60Equivalent units - FIFO method 5,820 5,610

As shown below, the equivalent units in beginning inventory aresubtracted from the equivalent units of production per theweighted-average method to obtain the equivalent units of

production under the FIFO method.

The FIFO method removes the equivalent units that were already in beginning inventory from the equivalent units as defined usingthe weighted-average method. Thus, the FIFO method isolates the equivalent units due to work performed during the current

period. This can be illustrated using the Smith Company example.


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Compute the cost perequivalent unit using the

FIFO method.


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Beginning work in process: 400 unitsMaterials: 40% complete $ 6,119Conversion: 20% complete $ 3,920

Production started during June 6,000 unitsProduction completed during June 5,400 units

Costs added to production in JuneMaterials cost $ 118,621

Conversion cost $ 81,130

Ending work in process 900 unitsMaterials: 60% completeConversion: 30% complete

Cost per Equivalent Unit - FIFO

Lets revisit the Smith Company Assembly Department

for the month of June to prepare our production report.


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The formula for computing the cost perequivalent unit under FIFO method is:

Cost per

equivalentunit

=

Cost added during the period

Equivalent units of production


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Total

Cost Materials Conversion

Cost added in June 199,751$ 118,621$ 81,130$

Equivalent units 5,820 5,610Cost per equivalent unit 20.3816$ 14.4617$

Total cost per equivalent unit = $20.3816 + $14.4617 = $34.8433

$118,600 5,820$81,130 5,610


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Assign costs to units using

the FIFO method.


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Ending WIP inventory:Equivalent units 540 270

Assembly Department

Cost of Ending WIP Inventory

Applying Costs - FIFO

Step 1: Record the equivalent units of production in endingWorkin Process Inventory.

900 units 60% 900 units 30%


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Step 2: Record the cost per equivalent unit.




Assembly Department



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Cost of Ending WIP inventory 11,006$ 3,905$ 14,911$

Assembly Department



Step 3: Compute the cost of ending Work in Process Inventory.

540 $20.3816 270 14.4617


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Cost of Units Transferred Out

Step 1: Record the cost in beginningWork in Process Inventory.


Cost of Units Transferred Out:

Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$

Assembly Department

Cost of Units Transferred Out in June


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Cost of Units Transferred OutStep 2: Compute the cost to completethe units in beginning

Work in Process Inventory.



Cost in beginning WIP inventory 6,119$ 3,920$ 10,039$Cost to complete beginning WIP

Equivalent units to complete 180 240


Cost to complete beginning WIP 3,668$ 3,471$ 7,139

Assembly Department



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Cost of Units Transferred OutStep 3: Compute the cost of units started and completedthis

period.







Cost of units started and completed:

Units started and completed 5,100 5,100Cost per equivalent unit 20.3816$ 14.4617$

Cost of units started and completed 103,946$ 73,755$ 177,701

Assembly Department



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Cost of Units Transferred Out

Step 4: Compute the total cost of units transferred out.







Cost of units started and completed:

Units started and completed 5,100 5,100Cost per equivalent unit 20.3816$ 14.4617$

Cost of units started and completed 103,946$ 73,755$ 177,701

Cost of Units Transferred Out 194,879$

Assembly Department



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Prepare a costreconciliation report

using the FIFO method.


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Reconciling Costs



Costs added to production during the period 199,751Total cost to be accounted for 209,790$

Assembly Department

Cost Reconciliation for June


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Reconciling Costs



Costs added to production during the period 199,751Total cost to be accounted for 209,790$

Cost accounted for as follows:

Cost of ending Work in Process Inventory 14,911$

Cost of units transferred out 194,879Total cost accounted for 209,790$

Assembly Department

Cost Reconciliation for June


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A Comparison of Costing Methods

In a lean production environment, FIFO andweighted-average methods yield similar

unit costs.

When considering cost control, FIFO issuperior to weighted-average because it

does not mix costs of the current period with

costs of the prior period.


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Service Department Allocations

Appendix 4B

O


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Operating Departments

Anoperating department carries outthe central purpose of the organization

The SurgeryDepartment

at MountSinai

Hospital.

AProductionDepartment

atMitsubishi.

TheGeographyDepartment

at the

University ofWashington.

S i D


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Service Departments

Service departments do not directlyengage in operating activities.

TheAccountingDepartment

at Macys.

The HumanResourcesDepartment

at Walgreens.

I d l S i


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Interdepartmental Services

ServiceDepartment

OperatingDepartment

Costs of the servicedepartment becomeoverhead costs to

the operatingdepartment

All i A h


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Allocation Approaches

DirectMethod

Step-DownMethod

ReciprocalMethod

R i l S i


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Reciprocal Services

ServiceDepartment 1

ServiceDepartment 2

When servicedepartments provideservices to each

other we call them

reciprocal services.

L i Obj ti 10


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Allocate servicedepartment costs to

operating departments

using the direct method.

Di t M th d


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Direct Method

ServiceDepartment(Cafeteria)

ServiceDepartment(Custodial)

OperatingDepartment(Machining)

Operating

Department(Assembly)

Interactionsbetween servicedepartments are

ignored and allcosts are

allocated directlyto operatingdepartments.

Di t M th d A E l


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Direct Method An Example

Service Department Allocation BaseCafeteria Number of employees

Custodial Square feet occupied

Di t M th d A E l


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How much of the Cafeteria and Custodial costsshould be allocated to each operating department

using the direct method of cost allocation?

Di t M th d A E l


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Allocation base: Number of employees

$360,000 2020 + 30

= $144,000

Direct Method An E ample


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$360,000 3020 + 30

= $216,000



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Allocation base: Square feet occupied

$90,000 25,00025,000 + 50,000

= $30,000



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50,00025,000 + 50,000

$90,000 = $60,000



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To allocate servicedepartment costs to

operating departments

using the step-downmethod.

Step Down Method


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OperatingDepartment(Machining)

Operating

Department(Assembly)

Step-Down Method

Once a servicedepartments costs

are allocated,other servicedepartment costsare not allocated

back to it.

ServiceDepartment(Cafeteria)


Step Down Method


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There are three key points to understand regarding

the step-down method:In both the direct and step-down methods, any

amount of the allocation base attributable to the

service department whose cost is being allocated is

always ignored.

Any amount of the allocation base that isattributable to a service department whose cost has

already been allocated is ignored. Each service department assigns its own costs to

operating departments plus the costs that havebeen allocated to it from other service departments.

Step-Down Method

Step Down Method An Example


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Service Department Allocation Base

Cafeteria Number of employees

Custodial Square feet occupied

We will use the same data usedin the direct method example.

Step-Down Method An Example



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Allocate Cafeteria costs first sinceit provides more service than Custodial.




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$360,000 1010 + 20 + 30

= $60,000





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$360,000 2010 + 20 + 30

= $120,000





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$360,000 3010 + 20 + 30

= $180,000





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New total = $90,000 original Custodial costplus $60,000 allocated from the Cafeteria.




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$150,000 25,00025,000 + 50,000

= $50,000





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$150,000 50,00025,000 + 50,000

= $100,000



Reciprocal Method


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Reciprocal Method

Interdepartmentalservices are given

full recognition

rather than partialrecognition as withthe step method.

Service

Department(Cafeteria)


Operating

Department(Machining)

OperatingDepartment(Assembly)

Because of its mathematical complexity,the reciprocal method is rarely used.

Quick Check Datafor Direct and Step-Down Methods


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for Direct and Step Down Methods

Allocation bases:

Business school administration costs (ADMIN):Number of employees

Business Administration computer services (BACS):Number of personal computers

The direct method of allocation is used.

Quick Check


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Quick Check

How much cost will be allocated fromAdministration to Accounting?

a. $ 36,000

b. $144,000

c. $180,000

d. $ 27,000

Quick Check


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How much cost will be allocated fromAdministration to Accounting?

a. $ 36,000

b. $144,000

c. $180,000

d. $ 27,000

Quick Check

$180,000 20

20 + 80= $36,000

Quick Check


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Quick Check

How much total cost will be allocated fromADMIN and BACS combined to theAccounting Department?

a. $ 52,500

b. $135,000

c. $270,000

d. $ 49,500

Quick Check


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a. $ 52,500

b. $135,000

c. $270,000

d. $ 49,500

Quick Check

$90,000 18

18 + 102= $13,500

Quick Check Data


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Quick Check Data

Allocation bases:

Business school administration costs (ADMIN):Number of employees

Business administration computer services (BACS):Number of personal computers

The step method of allocation is used.

Quick Check


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Quick Check


a. $35,250

b. $49,072c. $18,000

d. $26,333

Quick Check


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a. $35,250

b. $49,072c. $18,000

d. $26,333

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