Departmental Cost Allocation:
Departmental cost allocation refers to the allocation of overhead expenses in the department. This approach recognizes that manufacturing operation is divided into production department and support department.
Hence, cost allocation is used to allocate indirect expense between production department and support department.
Direct Method of cost allocation:
This method assumes that services department provides services to the production department only. It is simplest method of allocation because it ignores reciprocal flows.
When the cost of P1 changes from $ 100,000 to $ 120,000 it will not affect the answer calculated in 7-11 question because 7-11 deals with the cost of service departments allocated to the production department.
For such calculation percentage usage of the production department is service department required and not the cost of production department.
Hence, answer to 7-11 remain unchanged.
Under the direct method the cost of service departments are allotted only to the production department in the ratio of the percentage for the allocation of production department only.
The allocation of the of S2 would be in the ratio of 1:1 as the percentage is 40% for P1 and P2.The calculation is as follows-
Relative Sales Value Method:
Relative sales value method is one of the methods of allocating joint cost to the products. It is also known as the Sales value at split off method. In relative sales value method joint cost is allocated to the joint products based on their relative sales value at the split off point.
This method is most widely used in allocating joint cost.
Calculation of joint cost allocation:
Step 1: Calculation of total sales value at split off point:
Step 2: Calculation of proportion of sales value for each joint product
Putting the values in the above expression:
Step 3: Allocation of joint cost:
Putting the values: