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CHAPTER 15
ALLOCATION OF SUPPORT-DEPARTMENT COSTS,
COMMON COSTS, AND REVENUES
15-1 Distinguish between the single-rate and the dual-rate methods.
The single-rate (cost-allocation) method makes no distinction between fixed costs and variable
15-2 Describe how the dual-rate method is useful to division managers in decision making.
15-3 How do budgeted cost rates motivate the support-department manager to improve
efficiency?
15-4 Give examples of allocation bases used to allocate support-department cost pools to
operating departments.
15-5 Why might a manager prefer that budgeted rather than actual cost-allocation rates be used
for costs being allocated to his or her department from another department?
The use of budgeted indirect cost allocation rates rather than actual indirect rates has several
attractive features to the manager of a user department:
15-6 “To ensure unbiased cost allocations, fixed costs should be allocated on the basis of
estimated long-run use by user-department managers.” Do you agree? Why?
15-7 Distinguish among the three methods of allocating the costs of support departments to
operating departments.
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
c. The reciprocal (allocation) method allocates support-department costs to operating
15-8 What is conceptually the most defensible method for allocating support-department costs?
Why?
15-9 Distinguish between two methods of allocating common costs.
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
15-10 What are the challenges of using the incremental cost allocation method when allocating
common costs and how might they be overcome?
The challenges of using the incremental method is that every user wants to be considered the
lowest-ranked user because only small incremental costs are allocated to each
15-11 What role does the Cost Accounting Standards Board play when companies contract
with the U.S. government?
15-12 What is one key way to reduce cost-allocation disputes that arise with government
contracts?
15-13 Describe how companies are increasingly facing revenue-allocation decisions.
Companies increasingly are selling packages of products or services for a single price. Revenue
15-14 Distinguish between the stand-alone and the incremental revenue-allocation methods.
The incremental revenue allocation method ranks individual products in a bundle
according to criteria determined by management—such as the product in the bundle with the
15-15 Identify and discuss arguments that individual product managers may put forward to
support their preferred revenue-allocation method.
Managers typically will argue that their individual product is the prime reason why consumers
buy a bundle of products. Evidence on this argument could come from the sales of the products
15-16 Single-rate versus dual-rate methods, support department. The Cincinnati power plant
that services all manufacturing departments of Eastern Mountain Engineering has a budget for the
coming year. This budget has been expressed in the following monthly terms:
The expected monthly costs for operating the power plant during the budget year are $20,000:
$8,000 variable and $12,000 fixed.
Required:
1. Assume that a single cost pool is used for the power plant costs. What budgeted amounts will
be allocated to each manufacturing department if (a) the rate is calculated based on practical
capacity and costs are allocated based on practical capacity and (b) the rate is calculated
based on expected monthly usage and costs are allocated based on expected monthly usage?
2. Assume the dual-rate method is used with separate cost pools for the variable and fixed costs.
Variable costs are allocated on the basis of expected monthly usage. Fixed costs are allocated
on the basis of practical capacity. What budgeted amounts will be allocated to each
manufacturing department? Why might you prefer the dual-rate method?
SOLUTION
(20 min.) Single-rate versus dual-rate methods, support department.
Bases available (kilowatt hours):
Loretta Bently Melboum Eastmoreland Total
1a. Single-rate method based on practical capacity:
Loretta Bently Melboum Eastmoreland Total
8
1b. Single-rate method based on expected monthly usage:
Loretta Bently Melboum Eastmoreland Total
2. Variable-Cost Pool:
Loretta
Bently Melboum
Eastmorelan
d Total
Variable-cost pool
The dual-rate method permits a more refined allocation of the power department costs; it permits
15-17 Single-rate method, budgeted versus actual costs and quantities. Chocolat Inc. is a
producer of premium chocolate based in Palo Alto. The company has a separate division for each
of its two products: dark chocolate and milk chocolate. Chocolat purchases ingredients from
Wisconsin for its dark chocolate division and from Louisiana for its milk chocolate division.
Both locations are the same distance from Chocolat’s Palo Alto plant.
Chocolat Inc. operates a fleet of trucks as a cost center that charges the divisions for variable
costs (drivers and fuel) and fixed costs (vehicle depreciation, insurance, and registration fees) of
operating the fleet. Each division is evaluated on the basis of its operating income. For 2017, the
trucking fleet had a practical capacity of 50 round-trips between the Palo Alto plant and the two
suppliers. It recorded the following information:
Required:
1. Using the single-rate method, allocate costs to the dark chocolate division and the milk
chocolate division in these three ways.
a. Calculate the budgeted rate per round-trip and allocate costs based on round-trips budgeted
for each division.
b. Calculate the budgeted rate per round-trip and allocate costs based on actual round-trips
used by each division.
c. Calculate the actual rate per round-trip and allocate costs based on actual round-trips used
by each division.
2. Describe the advantages and disadvantages of using each of the three methods in requirement
1. Would you encourage Chocolat Inc. to use one of these methods? Explain and indicate any
assumptions you made.
SOLUTION
(20–25 min.) Single-rate method, budgeted versus actual costs and quantities.
Budgeted indirect costs
Budgeted trips
b. Budgeted rate = $2,300 per round-trip
Actual indirect costs
2. When budgeted rates/budgeted quantities are used, the Dark Chocolate and Milk
Chocolate Divisions know at the start of 2017 that they will be charged a total of $69,000 and
When budgeted rates/actual quantities are used, the Dark Chocolate and Milk Chocolate
Divisions know at the start of 2017 that they will be charged a rate of $2,300 per round trip, i.e.,
they know the price per unit of this resource. This enables them to make operating decisions
The use of actual costs/actual quantities makes the costs allocated to one division a
function of the actual demand of other users. In 2017, the actual usage was 45 trips, which is 5
Using actual costs/actual rates also means that any efficiencies or inefficiencies of the
For the reasons stated previously, of the three single-rate methods suggested in this
15-18 Dual-rate method, budgeted versus actual costs and quantities (continuation of
15-17). Chocolat Inc. decides to examine the effect of using the dual-rate method for allocating
truck costs to each round-trip. At the start of 2017, the budgeted costs were:
The actual results for the 45 round-trips made in 2017 were:
Assume all other information to be the same as in Exercise 15-17.
Required:
1. Using the dual-rate method, what are the costs allocated to the dark chocolate division and
the milk chocolate division when (a) variable costs are allocated using the budgeted rate per
round-trip and actual round-trips used by each division and when (b) fixed costs are allocated
based on the budgeted rate per round-trip and round-trips budgeted for each division?
2. From the viewpoint of the dark chocolate division, what are the effects of using the dual-rate
method rather than the single-rate method?
SOLUTION
(20 min.)Dual-rate method, budgeted versus actual costs and quantities (continuation of
15-17).
1. Charges with dual rate method.
Dark Chocolate Division
2. The dual rate changes how the fixed indirect cost component is treated. By using budgeted
trips made, the Dark Chocolate Division is unaffected by changes from its own budgeted usage
or that of other divisions. When budgeted rates and actual trips are used for allocation (see
15-19 Support-department cost allocation; direct and step-down methods. Phoenix Partners
provides management consulting services to government and corporate clients. Phoenix has two
support departments—administrative services (AS) and information systems (IS)—and two
operating departments—government consulting (GOVT) and corporate consulting (CORP). For
the first quarter of 2017, Phoenix’s cost records indicate the following:
Required:
1. Allocate the two support departments’ costs to the two operating departments using the
following methods:
a. Direct method
b. Step-down method (allocate AS first)
c. Step-down method (allocate IS first)
2. Compare and explain differences in the support-department costs allocated to each operating
department.
3. What approaches might be used to decide the sequence in which to allocate support
departments when using the step-down method?
SOLUTION
(30 min.) Support department cost allocation; direct and step-down methods.
1. AS IS GOVT CORP
The direct method ignores any services to other support departments. The step-down method
partially recognizes services to other support departments. The information systems support
group (with total budget of $2,400,000) provides 10% of its services to the AS group. The AS
3. Three criteria that could determine the sequence in the step-down method are as follows:
a. Allocate support departments on a ranking of the percentage of their total services
provided to other support departments.
b. Allocate support departments on a ranking of the total dollar amount in the support
departments.
c. Allocate support departments on a ranking of the dollar amounts of service provided
to other support departments
1. Information Systems
2. Administrative Services
The approach in (a) above typically better approximates the theoretically preferred
reciprocal method. It results in a higher percentage of support-department costs provided to other
support departments being incorporated into the step-down process than does (b) or (c), above.
15-20 Support-department cost allocation, reciprocal method (continuation of 15-19). Refer
to the data given in Exercise 15-19.
Required:
1. Allocate the two support departments’ costs to the two operating departments using the
reciprocal method. Use (a) linear equations and (b) repeated iterations.
2. Compare and explain differences in requirement 1 with those in requirement 1 of Exercise
15-19. Which method do you prefer? Why?
