Cost Accounting (14th Edition)

interconnection-wide cost allocation. Under this system, everybody
in the region where a new technology is deployed would have to
help pay for it. For example, if new power lines and “smart” energy
meters are deployed in Denver, everybody in Colorado
would help pay for them. Supporters argue that this
method would help lessen the costs consumers
would be charged by utilities for the significant
investments in new technology.
Another competing proposal would only
allocate costs to utility ratepayers that actually
benefit from the new “Smart Grid” system. Using
the previous example, only utility customers in
Denver would be charged for the new power
lines and energy meters (likely through additional
monthly utility costs). Supporters of this method
believe that customers with new “Smart Grid”
systems should not be subsidized by those not
receiving any of the benefits.
Regardless of the method selected, cost allocation is going to
play a key role in the future of the U.S. energy generation and
distribution system. The same allocation dilemmas apply to the costs
of corporate support departments and the apportionment of revenues
when products are sold in bundles. These concerns are common to
managers at manufacturing companies such as Nestle, service
companies such as Comcast, merchandising companies such as
Trader Joe’s, and academic institutions such as Auburn University.
This chapter focuses on several challenges that arise with regard to
cost and revenue allocations.
Allocating Support Department Costs Using the
Single-Rate and Dual-Rate Methods
Companies distinguish operating departments (and operating divisions) from support
departments. An operating department, also called a production department, directly
adds value to a product or service. A support department, also called a service
department, provides the services that assist other internal departments (operating departments
and other support departments) in the company. Examples of support departments
are information systems and plant maintenance. Managers face two questions when allocating
the costs of a support department to operating departments or divisions: (1) Should
fixed costs of support departments be allocated to operating divisions? (2) If fixed costs
are allocated, should variable and fixed costs be allocated in the same way? With regard
to the first question, most companies believe that fixed costs of support departments
should be allocated because the support department needs to incur fixed costs to provide
Learning
Objective 1
Distinguish the singlerate
method
. . . one rate for
allocating costs in a
cost pool
from the dual-rate
method
. . . two rates for
allocating costs in a
cost pool—one for
variable costs and one
for fixed costs