...Methods of Allocating Costs - Overview 1. Review the three Method of Allocating Costs. - Direct Method - Step Down Method - Reciprocal Method 2. Discuss the strengths and weaknesses of each method 3. Winery Problem – platform for discussing Joint Cost Allocations 4. Review remaining cost allocation problems. 5. Summarize and Review. State College Community Hospital State College Community Hospital has 2 Service Departments: 1. Maintenance 2. Food Services The Hospital also has three patient care units: 1. General Medicine 2. OB 3. Surgery Using the following information, we will allocate the costs of these 2 service departments to the 3 patient care units using the: 1. Direct Method 2. Stepdown Method – Maintenance First 3. Stepdown Method – Food Services First 4. Reciprocal Method State College Community Hospital Amount of Cost to be allocated: Maintenance Food Services $8,000,000 $3,000,000 Allocation Methods: Maintenance Costs are allocated based on square footage assigned to the unit. Food Service Costs are allocated based on number of meals served to the unit. State College Community Hospital Expected Utilization Rates Sq Footage Meals Served Food Services 10,000 30,000 Maintenance 10,000 10,000 Surgery 20,000 40,000 OB 30,000 30,000 General Medicine 30,000 90,000 Total 100,000 200,000 State College Community Hospital Allocate Based on Direct Method Allocated Maintenance Costs Food Services Maintenance Surgery OB General Medicine...
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...Cost Allocation ACC/561 April 23, 2012 Cost Allocation The purpose of cost allocation is to identify and correctly allocate costs associated with a job, product, or service. The main uses of cost allocation are to facilitate decision-making regarding costs, justify prices charged for products and services, cost control, and for optimal utilization of resources. There are several methods used for cost allocation, depending on the type of product or service offer by the company. Variable cost allocation includes only variable manufacturing costs, such as direct materials, direct labor, and variable manufacturing overhead. Absorption cost allocation includes manufacturing costs, including both variable and fixed overhead as well as direct labor and materials. There are advantages and disadvantages of each method, and these will be explored further. Methods of Cost Allocation There are three main methods of cost allocation used by businesses: The Direct Method, the Step Method, and the Reciprocal Method. The direct method, which is the simplest of the three, allocates the costs of service departments directly to operating departments. Under the direct method, there are no costs allocated from one service department to another service department regardless of how much service may be provided between them. For instance, there would be no cost allocation between a custodial department and the mail room, even though the custodial department cleans the mail room. ...
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...5 Cost Allocation and Activity-Based Costing Systems L E A R N I N G O B J E C T I V E S After studying this chapter, you will be able to 1. Explain the major purposes for allocating costs. 2. Explain the relationship between activities, resources, costs, and cost drivers. 3. Use recommended guidelines to charge the variable and fixed costs of service departments to other organizational units. 4. Identify methods for allocating the central costs of an organization. 5. Use the direct, step-down, and reciprocal allocation methods to allocate service department costs to user departments. 6. Describe the general approach to allocating costs to products or services. 7. Use the physical units and relative-sales-value methods to allocate joint costs to products. 8. Use activity-based costing to allocate costs to products or services. 9. Identify the steps involved in the design and implementation of activity-based costing systems. 10. Calculate activity-based costs for cost objects. 11. Explain why activity-based costing systems are being adopted. 12. Explain how just-in-time systems can reduce non-value-added activities Cost Accounting System. The techniques used to determine the cost of a product or service by collecting and classifying costs and assigning them to cost objects. A university’s computer is used for teaching and for government-funded research. How much of its cost should be assigned to each task? A city creates a special police unit to investigate a series...
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...Cost Behaviors and Allocation Health Financial Management Cost allocation is essentially a pricing process within the organization whereby managers allocate the costs of one department to other departments (Gapenski, pg 188). Because this pricing process does not occur in a market setting, no objective standard exists that establishes the price for the transferred services (Gapenski, pg 188). Cost allocation within a business must, to the extent possible, establish prices that proxy those that would be set under market conditions (Gapenski, pg 188). The goal of cost allocation is to assign all of the costs of an organization to the activities that cause them to be incurred (Gapenski, pg 188). Ideally, health services managers track and assign costs by individual patient, physician, diagnosis, reimbursement contract, and so on (Gapenski, pg 188). Managers at all levels within health services organizations are under pressure to optimize economic performance, which translates into reducing costs (Gapenski, pg 188). Many department heads are evaluated, and hence compensated and promoted, other dimensions is satisfactory (Gapenski, pg 188). Department heads are held accountable for the full costs associated with services performed by their departments (Gapenski, pg 188). Health care costs are increasing at an annual rate of 7% a year, which if sustained will bankrupt Medicare in nine years and increase the nation’s overall...
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...HSA 525 | Cost Behaviors and Allocation | Assignment 2 | Tomeka Lewis4/29/2012 | In today’s world of businesses and corporations, there is a common goal shared throughout every industry: increase profits. With increases in skills and developing methods, businesses have come far lengths in increasing their profits, or operating income. Controlling costs is the key to a positive operation. Executives and managerial branches are using what they know about costs to create business strategies. By gathering information on market demand and combining it with a marketing strategy that focuses on higher margin products, companies are able to continue and increase profits and survive. The Cost Volume Profit Analysis is the dominant and most cost efficient way of doing so. By understanding the economic concerns of cost structure, contribution margin, and break-even sensitivity, a business can create a decision model to enhance the company’s productivity. A brief outline is required in understanding the Cost Volume Profit analysis (or CVP) and creating a decision model. In a very general outlook, the CVP looks at how fixed, variable, and mixed costs change with changes in sales volume. The main goal is to determine what factors control costs and see how management can use this information to improve planning and control activity. The first step in any CVP analysis is picking an activity base relation to the nature of the company’s operation. For example, a retail...
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...Cost Allocation Assignment Kaneilia Williams Accounting in a Health Care Environment ACC/HC 561 April 23, 2012 Ruth E. Brown Academic and Western Hospitals Academic Hospital and Western Hospital share services as a result of a merger about a year ago. There is a parent organization that owns both hospitals and allows each to operate individual as its own profit center. Academic Hospital now handles all laboratory services for both hospitals and Western Hospital handles maternity services for both. Recently, an issue with the charges for amniocentesis arose because Western Hospital demanded a reduction in the price for laboratory services. This price reduction is requested because Western Hospital found an outside laboratory that will provide the same services for $375 instead of $400. The hospitals formed a joint committee address the issue. The cost allocation methods by both hospitals will be reviewed. The committee will decide how the cost centers were determined. The differences between fixed and variable costing will also be displayed. Cost Allocation Methods The cost allocation process involves transferring costs from area or department and allocates them to another area or department. “The goal of cost allocation is to associate costs as closely as possible with the patients who cause them to be incurred” (Finkler, Ward, and Baker, 2007). The main two types of cost allocation are indirect costs and allocation from one department...
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... Introduction Costs are linked with all types of organizations- business, nonbusiness, manufacturing, retail and service. Cost behavior, Cost accounting & allocation, and Budget- these are the three key requirements to run any business nowadays. Measuring cost behavior (cost measurement) is associated with understanding and calculating how activities of an organization affect different levels of cost. On the other hand, cost accounting is a kind of accounting method that targets to capture an organization’s costs of production by evaluating the input costs of each step of production as well as fixed costs. Then, cost allocation is the allocating of a common cost to several cost substances. Additionally, budget is an estimate of earnings and expenses for a set period of time. These are commonly used terms in financial accounting information as well as in any business. My company is called The EBag Co. Ltd, which is in business for more than 5 years in the production sector of the market. This profitable business is earning its profits by manufacturing affordable bags for consumers of all ages. My company will use these three requirements of this assignment to make business more profitable in coming days. I will use the five methods (will talk about only 3) of measuring cost function for my company to identify which costs will change and which will remain the same with changes in sales volume. Then, I will use cost allocation chart to help me to identify what...
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...CHAPTER 16 COST ALLOCATION: JOINT PRODUCTS AND BYPRODUCTS 161 Exhibit 161 presents many examples of joint products from four different general industries. These include: Industry Separable Products at the Splitoff Point Food Processing: • Lamb • Lamb cuts, tripe, hides, bones, fat • Turkey • Breasts, wings, thighs, poultry meal Extractive: • Petroleum • Crude oil, natural gas 162 A joint cost is a cost of a production process that yields multiple products simultaneously. A separable cost is a cost incurred beyond the splitoff point that is assignable to each of the specific products identified at the splitoff point. 163 The distinction between a joint product and a byproduct is based on relative sales value. A joint product is a product from a joint production process (a process that yields two or more products) that has a relatively high total sales value. A byproduct is a product that has a relatively low total sales value compared to the total sales value of the joint (or main) products. 164 A product is any output that has a positive sales value (or an output that enables a company to avoid incurring costs). In some jointcost settings, outputs can occur that do not have a positive sales value. The offshore processing of hydrocarbons yields water that is recycled back into the ocean as well as yielding oil and gas. The processing of mineral ore to yield gold and silver also yields dirt as an output...
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...additional space. The dialysis center should not suffer all the cost. Moving the dialysis center makes more sense because they can increase their revenue if they could take on more patients. The Outpatient Clinic increased their capacity thus should pay the costs of this consumption of the usage of 25% increase. Question 2 Yes. they should be charged the actual cost of the new facility because they are using the new facility. They were spending $300,000 allocating 20,000 square feet. Now they are spending $100,000 extra for an entire building. The outpatient clinic assumed the additional cost for the expansion of space they will be using as well. All departments’ costs would increase since the dialysis center is out of the building and not sharing the indirect costs for the facility use and other general indirect costs. Question 3 No, this only designates the money for the building and facility itself others costs. This is not including inflation, depreciation, insurance, and other fees. There are also advantages of the new building which includes the parking structure and easy access ability, newer equipment and facility therefore less maintenance required. Even though the building has a useful life over 20 years. On the 21st year it will be mortgage free however there still be other general indirect costs that makes up $270,000 of costs as well, these costs will only increase due to inflation and cost increase. Question 4 The revenue the pharmacy is making from...
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...Cost Allocation and Profitability at Hers Realtors Property Management In the property management business, empty units are lost money. Not only are they lost revenue, they have associated costs with them such as taxes, electricity, and yard upkeep. An empty unit represents a direct allocated cost for that unit. Per customer profitability increases with long term renters. When a renter vacates a property it will sit empty for a minimum of one month or more. Turnaround on units varies and with each passing month the costs allocated to that unit increase. In addition, there are the costs of obtaining a new renter, such as advertising and administrative costs. A unit that sits empty for more months out of the year than it is rented represents a loss position at the end of the year, rather than a revenue generating asset. The longer a unit sits empty, the lower the return on the investment and the lower the performance on the asset. Long term renters are preferable because it increases the overall demand for the units. Keeping tenants happy is the key to customer retention. The goal is to get them to sign another lease term. In the property management business this means responding promptly to service calls, enforcing noise ordinances, and attending to the overall upkeep of the units. When renters are happy, they are more likely to renew their lease when the term is up. They are also more likely to refer others who are looking for housing, building a close knit community of...
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...from simple writing implements (such as pens, pencils, and markers) and fasteners to specialty paper for modern highspeed copiers and printers. MOP had an excellent reputation for customer service and responsiveness. Warehouse personnel at MOP’s distribution center unloaded truckload shipments of products from manufacturers, and moved the cartons into designated storage locations until customers requested the items. Each day, after customer orders had been received, MOP personnel drove forklift trucks around the warehouse to accumulate the cartons of items and prepare them for shipment. MOP ordered supplies from many different manufacturers. It priced products to its end-use customers by first marking up the purchased product cost by 16% to cover the cost of warehousing, order processing, and freight. Then it added another 6% markup to cover the general, selling, and administrative expenses, plus an allowance for profit. The markups were determined at the start of each year, based on actual expenses in prior years and general industry and competitive trends. Midwest adjusted the actual price quoted to a customer based on long-term relationships and competitive situations, but pricing was generally independent of the specific level of service required by that customer, except for desktop deliveries. Typically, MOP shipped products to its customers using...
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...ACC650 Module 7 - Quiz Product Costing Systems and Cost Allocation Click Link Below To Buy: http://hwcampus.com/shop/acc650-module-7-quiz-product-costing-systems-cost-allocation/ 1) Indiana Company incurred the following costs during the past year when planned production and actual production each totaled 20,000 units: a. Direct material used $280,000 b. Direct labor $120,000 c. Variable manufacturing overhead $160,000 d. Fixed manufacturing overhead $100,000 e. Variable selling and administrative costs $60,000 f. Fixed selling and administrative costs $90,000 g. If Indiana uses variable costing, the total inventorial costs for the year would be: h. $400,000. $460,000 $560,000. $620,000. $660,000. 2) Garage Specialty Corporation manufactures joint products P and Q. During a recent period, joint costs amounted to $80,000 in the production of 20,000 gallons of P and 60,000 gallons of Q. Garage can sell P and Q at split-off for $2.20 per gallon and $2.60 per gallon, respectively. Alternatively, both products can be processed beyond the split-off point, as follows: i. P Q Separable processing costs $15,000 $35,000 Sales price (per gallon) if processed beyond split-off $3 $4 The joint cost allocated to Q under the relative-sales-value method would be: b. $40,000 $62...
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...The single-rate cost-allocation method may base the denominator choice on: A) master-budget capacity utilization B) normal capacity utilization C) practical capacity D) All of these answers are correct. 2) Benefits of the single-rate method include: A) the low cost of implementation B) fixed costs that are transformed into variable costs for user decision making C) signals regarding how variable and fixed costs behave differently D) information that leads to outsourcing decisions that benefit the organization as a whole 3) Benefits of the dual-rate method include: A) variable costs that are transformed into fixed costs for user decision making B) the low cost of implementation C) avoidance of expensive analysis for categorizing costs as either fixed or variable D) information that leads to outsourcing decisions that benefit the organization as a whole 4)The advantage of using practical capacity to allocate costs: A) is that it allows a downward demand spiral to develop B) is that it focuses management's attention on managing unused capacity C) is that budgets are much easier to develop D) Either A or B are correct. Answer the following questions using the information below: The Bonawitz Corporation has a central copying facility. The copying facility has only two users, the Marketing Department and the Operations Department. The following data apply to the coming budget year: Budgeted costs of operating the...
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...the differences in the four allocation methods discussed in the case. From your standpoint, which of the four methods is conceptually the most reasonable? Why? Direct allocation: each support department costs are allocated directly to the service departments that use the services. The direct allocation method is relatively simple to apply. None of the costs of providing support services is allocated to other support departments. Only the direct costs of the support departments are allocated to the patient services departments because no indirect costs have been created by intrasupport department allocations. This method is the least costly of the four. Step down: this method is a compromise between the more simple direct allocation method and the complex reciprocal method. This method recognizes that intrasupport departments effects that the direct method ignores but it doesn’t recognize the full range of interdependencies. It is a sequential, stair step pattern of allocation. Step down allocation talks place in a specific sequence. After each allocation is made in this method, a support department is removed from the process. Double apportionment: a slightly more complicated version of the step down method. This method first recognizes support provided by service departments to all other service departments as well as to the patient service departments. That first step is called the first allocation/apportionment. Some costs still remain in the support...
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...Advantages Makes cost allocation more fair Recognizes it’s true quality Could give a break because they are using the Same equipment and staff Dialysis Center is already using the same equipment and personnel Is there a better way? In order to offset the large facility costs; the Dialysis center should be able to claim revenues on direct utilization of pharmaceutical supplies; increasing their bottom line and potentially allowing them to remain financially stable through the facility transition. Is it “fair” for the Dialysis Center to suffer in profitability, and hence for the department head to possibly lose his bonus, just because the Outpatient Clinic needs additional space? Incentives Performance improvements Performance measures Disadvantages Costs more per square foot for the dialysis center For the Dialysis Center to bear the true costs, they forfeit the chance of generating true net profit. There will be more incentive to focus on outpatient services than Dialysis patients Other departments will find it less appealing to relocate if they know their profitability or contributions to the Hospital will decline severely when incurring true facility costs. How is pharmacy revenue handled? Pharmacy supplies used for dialysis cost the pharmacy $400,000 They profit $400,000 on drugs used Dialysis center books $800,000 in annual revenue They are charged $800,000 for the drugs they use Do you support the new allocation scheme? We agree...
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