James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
CONTENTSLearning Objectives | Introduction | Concepts Underlying Cost Allocations | Allocating Service Department Costs | Three Ways to Assign Costs | Types of Relationships Between Service Departments | Three Methods for Stage I Allocations | Allocations From the Product Cost Perspective | Allocations From the Service Cost Perspective | The Dual Rate of Flexible Budget Allocation Method | Comparing Departmental & Plant Wide Rates | Appendix: Joint & By-Products | A Method of Accounting for By-Products | Footnotes | Questions | Problems | Problem Solutions | Extra MC Questions
COMPARING DEPARTMENTAL AND PLANT WIDE RATES IN STAGE IIAt the beginning of this chapter it was stated that a plant wide overhead rate would provide accurate product costs only in cases where the company produces a single product, or a few similar products that consume all indirect resources in the same proportions in every department. If different products consume indirect resources in different proportions in the various departments, then using departmental overhead rates will provide more accurate product costs than using a plant wide rate. The example presented below illustrates this concept.
COGS 25and the entry to record the sale of the by-products is,
Factory overhead 25
Cash 100These entries reduce cost of goods sold by $75 which is the net amount received from the by-product sales.