Chapter 17 – Allocation of Support Activity Costs and Joint Costs
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CHAPTER 17
ALLOCATION OF SUPPORT ACTIVITY COSTS AND JOINT COSTS
Learning Objectives
1. Allocate service department costs using the direct method and the step-down
method.
2. Use the dual approach to service department cost allocation.
4. Allocate joint costs among joint products using each of the following techniques:
physical-units method, relative-sales-value method, and net-realizable-value
method.
5. Describe the purposes for which joint cost allocation is useful and those for
which it is not.
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Chapter Overview
I. Service Department Cost Allocation
A. Direct method
B. Step-down method
C. Reciprocal-services method (appendix)
II. Today’s Advanced Manufacturing Environment
A. The ride of activity-based costing
III. Joint Product Cost Allocation
A. Allocating joint costs
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Key Lecture Concepts
I. Service Department Cost Allocation
• Service departments are not directly involved in producing an
organization’s (end-product) goods and services; instead, they provide
support so that these activities can take place.
• Service department costs are handled in the following manner:
➢ Cost distribution—All costs are distributed among the appropriate
departments.
➢ Service department cost allocation—Service department costs are then
allocated to producing departments for which support is provided.
▪ The amounts allocated should be budgeted costs, not actual
costs, because use of the latter will result in service
department inefficiencies being passed along to users.
➢ Cost application—As a final step, costs are assigned to the goods or
services made in the producing departments.
• The direct method is the most straightforward method of service
department cost allocation. Costs are allocated only to producing
departments based on relative consumption of service.
➢ Consumption of service is linked to producing departments by
some causal measure. For example, the cost of buildings and
• The step-down method overcomes the limitation of the direct method,
with allocations being made to both producing departments and other
service departments. In other words, this method recognizes that service
departments provide service to producing departments as well as to other
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service departments. Under this approach:
➢ Allocations generally begin with the service department that serves
the greatest number of other service departments.
➢ The allocation is step-down in nature; that is, once a department’s
• The preceding problem is addressed by the reciprocal-services method
(see appendix). Under this approach, all service and producing
department relationships are recognized, and costs are allocated by the
use of simultaneous linear equations.
• Departmental costs (i.e., variable and fixed) may be combined and
allocated to other departments on a “lump-sum” basis.
➢ With this “lump-sum” procedure, one department’s usage of a
service can affect the cost that is allocated to a totally different
department.
• Under another approach, the dual-cost method, variable and fixed costs
are allocated to departments separately by the use of different allocation
bases.
➢ Variable costs are often charged based on short-term usage and
fixed costs are charged based on long-term average usage.
II. Today’s Advanced Manufacturing Environment
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• Service department cost allocations are less significant in today’s
advanced manufacturing environment because more costs are directly
traceable to product lines. As an example, machine maintenance in a
flexible manufacturing system (FMS) is often performed by the FMS cell
operators rather than a separate maintenance department.
III. Joint Product Cost Allocation
• Joint products arise when two or more products emerge from a single
manufacturing process (e.g., kerosene and gasoline in the petroleum
industry). The point in the production process at which the products are
distinguishable from one another is called the split-off point.
Teaching Tip: Although most of the text’s examples and problems for this topic
focus on manufacturing firms, joint costs and processes have relevance in the
service sector as well. For instance, ski-class instructors normally separate their
• An allocation method is needed at the split-off point to allocate the joint
process cost among the individual products. Such allocation is necessary
for inventory valuation and income determination purposes.
➢ Under the physical-units method, joint cost is allocated based on
▪ This approach is based on the assumption that the products
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are salable at split.
➢ The net-realizable-value method is a variation of the relative-sales-
value method, but it backs into a “value” at split-off when no
market exists at that point.
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Teaching Overview
In teaching the various cost allocation methods, I have the students do some role
playing on a variety of issues. For example, which department would they like to head
to it.) What behavioral problem might arise if you are heading a service department
I recommend using Exercise 17-18 (direct method) and Exercise 17-19 (step-down
method) to demonstrate the concepts of service cost allocation with the same data set.
Exercises 17-20, 17-21, and 17-22 are good demonstration examples of joint cost
allocation methods, again all extending from the same set of data.
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Links to the Text
Homework Grid
Item No.
Learning
Objectives
Completion
Time (min.)
Exercises:
17-15
1
15
17-16
1
15
17-17
1
30
17-18
1
15
17-19
1
15
17-20
4
10
17-21
4
15
17-22
4
25
17-23
6
25
Problems:
17-24
1, 3
40
17-25
1
40
17-26
1, 2
70
17-27
1, 3
50
17-28
4, 5
40
17-29
4
35
17-30
4, 5
30
17-31
4, 5
40
17-32
4, 5
45
17-33
6
30
17-34
2, 6
55
Cases:
17-35
4
40
17-36
4, 5
50