Allocation of Common Costs

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 pools—a variable-cost pool and a fixed-cost pool—with each pool using a different cost-allocation base.

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.

3. Budgeted cost rates motivate the manager of the support department to improve efficiency because the support department bears the risk of any unfavorable cost variances.

15-4 Examples of bases used to allocate support department cost pools to operating departments include the number of employees, square feet of space, number of direct labor hours, and machine-hours.

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.

6. Disagree. Allocating costs on “the basis of estimated long-run use by user department managers” means department managers can lower their cost allocations by deliberately underestimating their long-run use (assuming all other managers do not similarly underestimate their usage).

15-7 The three methods differ in how they recognize reciprocal services among support departments:...