Cost Accounting (14th Edition)

15
Allocation of Support-Department
Costs, Common Costs, and Revenues
Learning Objectives
1. Distinguish the single-rate method
from the dual-rate method
2. Understand how divisional incentives
are affected by the choice
between allocation based on budgeted
and actual rates, and budgeted
and actual usage
3. Allocate multiple supportdepartment
costs using the direct
method, the step-down method,
and the reciprocal method
4. Allocate common costs using the
stand-alone method and the incremental
method
5. Explain the importance of explicit
agreement between contracting
parties when the reimbursement
amount is based on costs incurred
6. Understand how bundling of products
gives rise to revenue allocation
issues and the methods for
doing so
How a company allocates its overhead and internal
support costs—costs related to marketing, advertising,
and other internal services—among its various production
departments or projects, can have a big impact on how
profitable those departments or projects are.
While the allocation won’t affect the firm’s profit as a whole, if the
allocation isn’t done properly, it can make some departments and
projects (and their managers) look better or worse than they should
profit-wise. As the following article shows, the method of allocating
costs for a project affects not just the firm but also the consumer.
Based on the method used, consumers may spend more, or less,
for the same service.
Cost Allocation and the Future of “Smart Grid”
Energy Infrastructure 1
Across the globe, countries are adopting alternative methods of
generating and distributing energy. In the United States, government
leaders and companies ranging from GE to Google are advocating the
movement towards a “Smart Grid”—that is, making transmission and
power lines operate and communicate in a more effective and efficient
manner using technology, computers, and software. This proposed
system would also integrate with emerging clean energy sources,
such as solar farms and geothermal systems, to help create a more
sustainable electricity supply that reduces carbon emissions.
According to the Electric Power Resource Institute, the cost of
developing the “Smart Grid” is $165 billion over the next two
decades. These costs include new infrastructure and technology
improvements—mostly to power lines—as well as traditional indirect
costs for the organizations upgrading the power system, which
include traditional support-department costs and common costs.
Private utilities and the U.S. government will pay for the upfront costs
of “Smart Grid” development, but those costs will be recouped over
time by charging energy consumers. But one question remains: How
should those costs be allocated for reimbursement?
A controversy has emerged as two cost allocation methods are
being debated by the U.S. government. One method is
542
1 Sources: Garthwaite, Josie. 2009. The $160B question: Who should foot the bill for transmission buildout?”
Salon.com, March 12; Jaffe, Mark. 2010. Cost of Smart-Grid projects shocks consumer advocates. The
Denver Post, February 14.