ENC 500 Saudi Electronic University Trade Barriers and Cost Allocation Paper
Description
Critical Thinking: Trade barriers
Select a country of your choice (other than Saudi Arabia) and discuss why the country imposes trade barriers. What is the effect on the economy of the country? (Analyze the effect on the trade balance, employment, and economic growth). What are the arguments for and against trade barriers in your chosen country?
Directions:
Your essay is required to be four to five pages in length, which does not include the title page and reference pages, which are never a part of the content minimum requirements.
Support your submission with course material concepts, principles, and theories from the textbook and at least three scholarly, peer-reviewed journal articles.
Required readings:
Chapter 5 in International Economics (attached)
Ting, C., & Hsiao, Y. (2020). Exploring solutions for the trade barriers in Taiwan. Advances in Management and Applied Economics, 10(5), 17-34.
Zolin, M., Cavapozzi, D., & Mazzarolo, M. (2020). Food security and trade
policies: evidence from the milk sector, case study. British Food Journal, 123(13), 59-72. https://doi-org.sdl.idm.oclc.org/10.1108/BFJ-07-2020-0577
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INTERNATIONAL
ECONOMICS
SEVENTEENTH EDITION
ROBERT J. CARBAUGH
© 2019 Cengage. All rights reserved.
1
Chapter 5
Nontariff Trade
Barriers
© 2019 Cengage. All rights reserved.
2
CHAPTER OUTLINE
(1 of 2)
Absolute Import Quota
Tariff-Rate Quota: A Two-Tier Tariff
Export Quotas
Domestic Content Requirements
Subsidies
© 2019 Cengage. All rights reserved.
3
CHAPTER OUTLINE
(2 of 2)
Dumping
Antidumping Regulations
Is Antidumping Law Unfair?
Other Nontariff Trade Barriers
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4
Absolute Import Quota
(1 of 7)
Nontariff trade barriers
Policies other than tariffs that restrict international
trade
Absolute quota
Physical restriction on quantity of goods imported
during a specific time period
© 2019 Cengage. All rights reserved.
5
Absolute Import Quota
(2 of 7)
Import licenses
Government allocates import licenses to
importers, permitting them to import product
only up to prescribed limit, regardless of
market demand
Global quota
Permits specified quantity of goods imported
each year; does not specify from where
product is shipped or who imports
Plagued by accusations of favoritism
© 2019 Cengage. All rights reserved.
6
Absolute Import Quota
(3 of 7)
Selective quota
Import quota allocated to specific countries
May lead to domestic monopoly of production
and higher prices
Quotas may lead to domestic monopoly of
production and higher prices
© 2019 Cengage. All rights reserved.
7
Absolute Import Quota
(4 of 7) Figure 5.1
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8
Absolute Import Quota
(5 of 7)
Trade and Welfare Effects
Price increase
Decrease in consumer surplus
Redistributive effect (a)
Deadweight loss (b + d)
Protective effect (b)
Consumption effect (d)
Revenue effect (c)
Windfall profits, a.k.a. quota rent
© 2019 Cengage. All rights reserved.
9
Absolute Import Quota
(6 of 7)
Quotas versus Tariffs
When demand is growing, an absolute quota
restricts volume of imports by greater amount
than equivalent import tariff
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10
Absolute Import Quota
(7 of 7) Figure 5.2
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11
Tariff-Rate Quota:
A Two-Tier Tariff (1 of 5)
Tariff-rate quota
Two components
Allows specified number of goods to be imported
at lower tariff rate (within-quota rate)
Any imports above this level face higher tariff rate
(the over-quota rate)
© 2019 Cengage. All rights reserved.
12
Tariff-Rate Quota:
A Two-Tier Tariff (2 of 5)
Administration of tariff-rate quotas
License on demand allocation
If demand for licenses is less than quota, system
operates on first come, first serve basis
If demand exceeds quota, import volume
requested is reduced proportionally among all
applicants
Allocation may also be based on historical market
share or auctions
© 2019 Cengage. All rights reserved.
13
Tariff-Rate Quota:
A Two-Tier Tariff (3 of 5)
WTO requires members to convert all
NTBs to tariffs; during transition, tariff-rate
quotas permitted
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14
Tariff-Rate Quota:
A Two-Tier Tariff (4 of 5)
Examples of U.S. Tariff-Rate Quotas
Product
Within-Quota
Tariff Rate
Import-Quota
Threshold
Over-Quota Tariff
Rate
Peanuts
$0.935/kg
30,393 tons
187.9% ad valorem
Beef
$0.44/kg
634,621 tons
31.1% ad valorem
Milk
$0.32/L
5.7 million L
$0.885/L
Blue cheese
$0.10/kg
2.6 million kg
$2.60/kg
Source: From U.S. International Trade Commission, Harmonized Tariff Schedule of the United States,
Washington, DC, U.S. Government Printing Office, 2017.
© 2019 Cengage. All rights reserved.
15
Tariff-Rate Quota:
A Two-Tier Tariff (5 of 5)
Sugar tariffs are bittersweet
U.S. sugar growers receive government guaranteed
minimum price for sugar, but this attracts imported
sugar
To prevent imports, U.S. implements tariff-rate
quotas
U.S. price of sugar almost twice world market price
Many candy firms that use sugar have left country;
those that remain pass price on to consumers
© 2019 Cengage. All rights reserved.
16
Export Quotas
(1 of 2)
Export quotas
Governments enter as form of voluntary export
restraint agreements
Moderates intensity of international competition;
tend to be more costly than tariffs
Identical effect to equivalent import quotas,
except implemented by exporting nation
In 1980s, 67% of costs to U.S. consumers of
these restraints captured by foreign exporters as
profit
© 2019 Cengage. All rights reserved.
17
Export Quotas
(2 of 2)
Japanese Auto Restraints Put Brakes on U.S.
Motorists
U.S. & Japan agreed to limit Japanese exports for
3 years beginning in 1981; purpose to help U.S.
auto industry
But large Japanese car makers largely
unaffected; increased prices & earned record
profits
In 1984, U.S. consumer paid extra $660 per
Japanese auto and $1,300 per U.S. auto
44,000 U.S. jobs saved at cost of $100,000/job
© 2019 Cengage. All rights reserved.
18
Domestic Content Requirements
(1 of 2)
To limit outsourcing, labor lobbied for
domestic content requirements
Minimum percentage of a goods value must
be produced locally to qualify for zero tariff
rates
Pressure domestic/foreign firms to use
domestic inputs/workers
Can result in higher input and product prices
and loss of competitiveness
Subsidized by domestic consumers
© 2019 Cengage. All rights reserved.
19
Domestic Content Requirements
(2 of 2)
© 2019 Cengage. All rights reserved.
20
Subsidies
(1 of 4)
Subsidies
May take form of outright cash
disbursements, tax concessions, insurance
arrangements, and subsidized loans
© 2019 Cengage. All rights reserved.
21
Subsidies
(2 of 4)
Domestic Production Subsidy
Results in
Higher output
Redistributive effects increase in producer
surplus for more efficient producers
Deadweight loss – protective effect
Lower welfare losses than a tariff/quota
Financed by taxpayers
© 2019 Cengage. All rights reserved.
22
Subsidies
(3 of 4)
Export Subsidy
Whereas domestic production subsidy is
granted to producers of import-competing
goods, an export subsidy goes to producers
of goods to be sold overseas
For both, net price received by producer equals
price paid by purchaser plus subsidy, and subsidy
revenue redistributed in form of producer surplus
© 2019 Cengage. All rights reserved.
23
Subsidies
(4 of 4)
Export Subsidy (contd)
Higher output and prices for exporters
Higher exports; lower domestic consumption
Domestic producers gain at expense of
domestic consumers and taxpayers
Decrease in consumer surplus
Increase in producer surplus
Taxpayers bear cost of export subsidy
Deadweight losses (welfare)
© 2019 Cengage. All rights reserved.
24
Dumping
(1 of 4)
Dumping
A form of international price discrimination
Occurs when foreign buyers are charged
lower prices than domestic buyers for
identical product
Also, selling in foreign markets at a price
below cost of production
© 2019 Cengage. All rights reserved.
25
Dumping
(2 of 4)
Forms of Dumping
Sporadic Dumping
A firm disposes of excess inventories in foreign
markets by selling at price below domestic price
Predatory Dumping
Producer temporarily reduces price charged
abroad to drive foreign competitors out of business
Persistent Dumping
Goes on indefinitely; to maximize economic profits,
a producer may consistently sell abroad at lower
price than at home
© 2019 Cengage. All rights reserved.
26
Dumping
(3 of 4)
International Price Discrimination
Producer charges more at home with less
competition, and more overseas to compete
Submarkets demand conditions must differ
Different demand elasticities (home/foreign)
Firm must be able to separate submarkets
Prevent arbitrage (resale of goods at higher price)
Markets easier to separate internationally
High transportation costs
Trade restrictions
© 2019 Cengage. All rights reserved.
27
Dumping
(4 of 4) Figure 5.5
© 2019 Cengage. All rights reserved.
28
Antidumping Regulations
(1 of 6)
Antidumping duty
Levied when
U.S. Department of Commerce determines foreign
merchandise being sold at less than fair value
(LTFV); and
U.S. International Trade Commission (ITC)
determines that LTFV imports are causing or
threatening material injury to domestic industry
Anti-dumping duties imposed in addition to
the normal tariff
© 2019 Cengage. All rights reserved.
29
Antidumping Regulations
(2 of 6)
Margin of dumping
Amount by which foreign market value
exceeds U.S. price
Foreign market value two definitions
Priced-based definition
Dumping occurs when foreign firm sells good at
price in U.S. below home price
© 2019 Cengage. All rights reserved.
30
Antidumping Regulations
(3 of 6)
Foreign market value
Cost-based definition (used when pricebased definition cannot be applied)
Cost of manufacturing merchandise + general
expenses (at least 10% of cost of manufacturing) +
profit on home-market sales (at least 8% of
manufacturing cost + general expense) +
packaging merchandise for shipment to U.S.
© 2019 Cengage. All rights reserved.
31
Antidumping Regulations
(4 of 6)
Whirlpool Agitates for Antidumping Tariffs
on Clothes Washers
93,000 employees, $21 billion in annual sales,
and 70 manufacturing and technology
research centers throughout the world in
2017.
In 2011, Whirlpool filed anti-dumping and antisubsidy petitions against Samsung & LG,
which it contended were selling in U.S. at
prices substantially less than fair value
© 2019 Cengage. All rights reserved.
32
Antidumping Regulations
(5 of 6)
2016: Whirlpool filed again
2017: U.S. International Trade
Commission approved Whirlpools petition
for safeguard protection
© 2019 Cengage. All rights reserved.
33
Antidumping Regulations
(6 of 6)
Vaughan-Bassett Furniture Company:
Furniture Dumping from China
Vaughan-Bassett Furniture and other U.S. furniture
manufactures (over opposition of many U.S. furniture
retailers) filed antidumping complaint against China
In 2005, U.S. government imposed dumping duties of on
most Chinese furniture shipped to U.S.
Resulted in decrease in Chinese furniture sold in U.S.
However, imports from Vietnam, Indonesia, and other
countries filled vacuum
Returned Vaughan-Bassett Furniture to profitability; is now
largest wood bedroom manufacturer in U.S.
© 2019 Cengage. All rights reserved.
34
Is Antidumping Law Unfair?
(1 of 4)
Antidumping laws
Supporters claim such laws needed to ensure
level playing field by offsetting artificial
sources of competitive advantage
Critics note that although protected industries
gain, consumers lose more and economy as
whole therefore suffers net loss
© 2019 Cengage. All rights reserved.
35
Is Antidumping Law Unfair?
(2 of 4)
Should Average Variable Cost be the Yardstick
for Defining Dumping?
Economists argue that fair value should be based on
average variable cost rather than average total cost,
especially when domestic economy experiences
temporary downturns in demand
Under competitive conditions, firms price goods at
average variable cost
Antidumping laws punish competitive behavior
U.S. firms selling at home not subject to same rules
© 2019 Cengage. All rights reserved.
36
Is Antidumping Law Unfair?
(3 of 4) Table 5.3
Dumping and Excess Capacity
No Dumping
Dumping
Home sales
100 units @ $300
100 units @ $300
Export sales
0 units @ $300
50 units @ $250
Sales revenue
$30,000
$42,500
Less variable costs of $200 per unit
?20,000
?30,000
$10,000
$12,500
?10,000
?10,000
$0
$2,500
Less total fixed costs of $10,000
Profit
© 2019 Cengage. All rights reserved.
37
Is Antidumping Law Unfair?
(4 of 4)
Should Antidumping Law Reflect Currency
Fluctuations?
Fluctuations in exchange rate can cause a foreign
producer to dump, according to legal definition
Are Antidumping Duties Overused?
Now, nations small and large bring antidumping
cases, leading to retaliation
In many cases where imports were determined to
be dumped, they would not have been
questioned under the same countries antitrust
laws
© 2019 Cengage. All rights reserved.
38
Other Nontariff Trade Barriers
(1 of 5)
Government procurement policies: Buy
American
1933, Buy American Act
Requires federal agencies to purchase
materials and products from U.S. suppliers
if prices not unreasonably higher than
foreign
Domestic product, must 50% domestic
component content and be USA
manufactured
© 2019 Cengage. All rights reserved.
39
Other Nontariff Trade Barriers
(2 of 5)
Government procurement policies (cont.)
1933, Buy American Act
U.S. suppliers of civilian agencies
preferences over foreign firms
6-12% preference margin
50% preference margin for Department of
Defense
Preferences waived if U.S.-produced good
is not available in sufficient quantities or is
not of satisfactory quality
© 2019 Cengage. All rights reserved.
40
Other Nontariff Trade Barriers
(3 of 5)
Social Regulations
Correct a variety of undesirable side effects
markets ignore
Health, safety, and the environment
CAFÉ Standards
Corporate average fuel economy standards
Passenger cars: 37.8 miles per gallon (2016)
Light trucks: 28.8 miles per gallon (2016)
© 2019 Cengage. All rights reserved.
41
Other Nontariff Trade Barriers
(4 of 5)
Europe Has a Cow over Hormone-Treated
U.S. Beef
Ban on hormone-treated meat
© 2019 Cengage. All rights reserved.
42
Other Nontariff Trade Barriers
(5 of 5)
Sea transport and freight regulations
U.S. shipping companies serving Japanese ports
complained of highly restrictive system of port
services
Required to clear every detail of visits with Japans
stevedore-company association
Dockworkers available only 18 hours a day or less
Made U.S. goods more expensive in Japan
In 1997, U.S. and Japan, on brink of trade war,
reached agreement to liberalize port services in
Japan
© 2019 Cengage. All rights reserved.
43
Chapter 5
Support
Department and
Joint Cost
Allocation
Support Departments (slide 1 of 3)
A support department provides a necessary
service to produce a product, but is not directly
involved in the production process.
o
For example, Janitorial and Maintenance departments
are necessary for production, but are not directly
involved in production.
Support departments are sometimes called service
departments because they provide services to
other departments.
Support departments are normally accounted for as
a cost or responsibility center. All direct costs of the
support department are accumulated in the center.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Support Departments (slide 2 of 3)
Because support department costs are only
indirectly related to production, they are difficult to
apply to products.
o
However, it is difficult, if not impossible, to find an
appropriate cost driver for applying these costs to a
product.
Some companies consider support department
costs to be facility-level costs and do not apply them
to products.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Support Departments (slide 3 of 3)
o
This approach ignores the fact that support
department services may be used more heavily by
some products than others, which can result in
inaccurate product costs.
? Hence, guidance for incorporating support department cost
allocation into a product costing system is provided in the
following slides.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Single Plantwide Rate (slide 1 of 2)
When a single plantwide overhead rate is used to
apply overhead to products, support department
costs are simply combined with all other overhead
costs.
o
The total overhead cost is then applied to the
products using a single cost driver.
Because a single driver is used for all overhead
costs, it is unlikely that the driver selected is
appropriate for every type of overhead.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Single Plantwide Rate (slide 2 of 2)
o
This method ignores the fact that the processes used
in manufacturing a product may differ from those
used for other products.
o
As a result, using a single plantwide rate may result in
inaccurate product costs.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Multiple Production Department Rates
When multiple production department rates are
used to apply overhead to products, overhead costs
are first directly traced or distributed to support and
production departments.
o
Support department costs are then allocated to
production departments based on the amount of
support activity used by each production department.
o
After support department costs are allocated to the
production departments, production department costs
are then applied to the products using cost drivers for
each production department.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Activity-Based Costing (slide 1 of 2)
When activity-based costing (ABC) is used to apply
overhead to products, support department costs are
referred to as support activity costs.
o
The process for allocating support activity costs is
similar to that used with multiple production
department rates.
? Overhead costs are directly traced or distributed to
support and production activities.
? Support activity costs are allocated to production
activities.
? Production activity costs are applied to the products
using cost drivers for each production activity.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Activity-Based Costing (slide 2 of 2)
The terms assign, distribute, apply, and allocate are
often used when referring to manufacturing costs
and the transfer of these costs to departments and
products.
o
Transferring overhead costs to support and
production departments is referred to as distributing
overhead costs.
o
Transferring costs to products is referred to as
applying costs to products or the application of costs.
o
Allocating costs or cost allocation may be used in a
variety of ways.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Allocating Support Department Costs
to Production Departments
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Direct Method
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Using the Direct Method Decker Tables
(slide 1 of 6)
Step 1 – The costs for each department are determined
by identifying costs that can be traced to a specific
department.
Janitorial
Department
Department
costs
$310,000
Cafeteria
Department
$169,000
Cutting
Department
$1,504,000
Assembly
Department
$680,000
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Using the Direct Method Decker Tables
(slide 2 of 6)
Step 2 – An appropriate cost driver is determined for
each support department.
o
The more square footage that needs to be the cleaned, the
higher the Janitorial costs.
Support Department
Cost Driver
Janitorial Department
Square footage to be serviced
Cafeteria Department
Number of employees
Step 3 – The usage of the support department cost
drivers by each department is determined.
Cost Driver
Janitorial
Department
Cafeteria
Department
Cutting
Department
Assembly
Department
Square feet
50
5,000
1,000
4,000
Number of employees
10
3
30
10
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Using the Direct Method Decker Tables
(slide 3 of 6)
Step 4 – The percentage usage of support
department cost drivers by the production
departments is determined.
o
Determining the percentage usage based on square
footage
1,000
Cutting Department:
= 20% of Janitorial Services
1,000 + 4,000
4,000
Assembly Department:
= 80% of Janitorial Services
1,000 + 4,000
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Using the Direct Method Decker Tables
(slide 4 of 6)
o
Determining the percentage based on the number of
employees
30
Cutting Department:
= 75% of Janitorial Services
30 + 10
10
Assembly Department:
= 25% of Cafeteria Services
30 + 10
Step 5 – Support department costs are allocated
to the production departments by multiplying the
percentage usage of each production
department by the total support department
costs.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Using the Direct Method Decker Tables
(slide 5 of 6)
Department
Janitorial Department Costs
Cutting Department
$ 62,000 ($310,000 × 20%)
Assembly Department
Total
248,000 ($310,000 × 80%)
$310,000
The Cafeteria costs of $126,750 are allocated
$161,250 to the Cutting Department and $42,250 to
the Assembly Department, as follows:
Department
Cafeteria Department Costs
Cutting Department
$126,750 ($169,000 × 75%)
Assembly Department
Total
42,250 ($169,000 × 25%)
$169,000
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Using the Direct Method Decker Tables
(slide 6 of 6)
The support department costs are added to any
costs that were directly traced or distributed to
the production departments in Step 1.
o
Thus, the total costs of the Cutting and Assembly
departments are as follows:
Cutting Department
$1,504,000 (from Step 1) + $62,000 (from Step 5) + $126,750 (from Step 5) = $1,692,750
Assembly Department
$680,000 (from Step 1) + $248,000 (from Step 5) + 42,250 (from Step 5) = $970,250
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Sequential Method or Step-Down Method
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Sequential Method (slide 1 of 7)
Under the sequential method, support department
costs are never allocated back to a support
department whose costs have already been
allocated.
o
As a result, the sequential method captures some, but
not all, of the inter-support-department services.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Sequential Method Allocation of Costs
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Sequential Method (slide 2 of 7)
There may be a conflict in the preceding factors.
o
For example, the support department with the highest costs may
serve the fewest number of other support departments.
o
As a result, managers often make subjective assessments about
the order of allocating support departments.
Steps 1 to 3 of the sequential method are the same as
for the direct method.
Support Departments
Specifics
Production Departments
Janitorial
Cafeteria
Square feet
50
5,000
1,000
4,000
Number of employees
10
3
30
10
$310,000
$169,000
$1,504,000
$680,000
Department costs
Cutting Assembly
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Sequential Method (slide 3 of 7)
In Step 4, the proportional usage of each
support departments cost driver by the other
departments to which its costs are to be
allocated is determined.
o
Assume that Decker Tables decides to allocate
Janitorial costs first, followed by Cafeteria costs.
Janitorial Department Usage
Department
Square Feet
Usage Percent
Cafeteria
5,000
50%
Cutting
1,000
10
Assembly
4,000
40
Totals
10,000
100%
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Sequential Method (slide 4 of 7)
The proportional usage of Cafeteria services by the
Cutting and Assembly departments is as follows:
Cafeteria Department Usage
Department
o
Square Feet
Usage Percent
Cafeteria
5,000
50%
Cutting
1,000
10
Assembly
4,000
40
Totals
10,000
100%
The usage of the Cafeteria Department by the Janitorial
Department is not considered.
? This is because the Cafeteria Department costs are allocated after
the Janitorial Department.
o
Once a support departments costs are allocated under the sequential
method, it is not allocated any additional costs.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Sequential Method (slide 5 of 7)
In Step 5, each support departments costs are
allocated to other departments.
o
The support departments total costs are multiplied by
the proportional usage of the departments to which
costs are allocated.
Under the sequential method, the total support
department costs to be allocated will also include
any costs that were allocated to that support
department from other support departments.
o
This is a major difference between the sequential
method and the direct method.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Sequential Method (slide 6 of 7)
To illustrate, the Janitorial Departments costs of
$310,000 are allocated to the Cafeteria, Cutting, and
Assembly departments by multiplying $310,000 by
each departments proportional usage, as follows:
Department
Cafeteria
Department
Janitorial Department
Costs ($)
$310,000 ×
Cutting
Department
310,000
Assembly
Department
310,000
Totals
×
×
×
Usage
Allocated
=
Percent (%)
Cost ($)
50% =
$155,000
10
=
31,000
40
=
124,000
100%
$310,000
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Sequential Method (slide 7 of 7)
The total Cafeteria Department costs of $324,000
($169,000 + $155,000) are allocated to the Cutting
and Assembly departments as follows:
Department
Cutting
Department
Assembly
Department
Totals
Cafeteria Department
Costs ($)
×
$324,000 ×
324,000
×
Usage
Allocated
=
Percent (%)
Cost ($)
75% =
25
100%
=
$243,000
81,000
$324,000
The support department cost allocations using the
sequential method for Decker Tables are
summarized in the next slide.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Reciprocal Services Method
(slide 1 of 10)
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Reciprocal Services Method
(slide 2 of 10)
Steps 1 to 3 of the reciprocal method are the same
as for the direct and sequential methods.
Specifics
Janitorial
Cafeteria
Square feet
50
5,000
1,000
4,000
Number of
employees
10
3
30
10
$310,000
$169,000
$1,504,000
$680,000
Department cost
Cutting
Assembly
Support departments never allocate their own costs
to themselves.
o
The two cells shaded in the table are not needed.
? These drivers represent services the support departments
used within their departments.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Reciprocal Services Method
(slide 3 of 10)
In Step 4, the proportional usage of each support
departments cost driver by the other departments to
which its costs are to be allocated is determined.
The proportional usages of Janitorial services are
the same as those indicated with the sequential
method.
Janitorial Department Usage
Department
Square
Feet
Usage
Percent
Cafeteria Department Usage
Department
Number of
employees
Usage
Percent
Cafeteria
5,000
50%
Janitorial
10
20%
Cutting
1,000
10
Cutting
30
60
Assembly
4,000
40
Assembly
10
20
Totals
10,000
100%
Totals
50
100%
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Reciprocal Services Method
(slide 4 of 10)
In Step 5, support department costs are allocated
simultaneously among the departments.
o
This is done by using multiple algebraic equations with
variables for unknown quantities.
o
To illustrate, costs are allocated from Janitorial to
Cafeteria, Cutting, and Assembly by multiplying the total
Janitorial costs by the proportional usage of the other
departments.
o
The total Janitorial costs, however, include an unknown
amount for costs related to its employees use of the
cafeteria.
? Thus, the total of the Janitorial costs is expressed by the
unknown, J.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Reciprocal Services Method
(slide 5 of 10)
Costs are allocated from Cafeteria to Janitorial,
Cutting, and Assembly by multiplying the total
Cafeteria costs by the proportional usage of the
other departments.
o
But again, the total Cafeteria costs will include an
unknown amount for costs related to the Cafeteria
Departments use of the Janitorial Departments
services.
o
Thus, the total of the Cafeteria costs is expressed by
the unknown, C.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Reciprocal Services Method
(slide 6 of 10)
The total costs of the Janitorial Department will
include 20% of the Cafeteria Departments
costs, which is the percent usage of the cafeteria
by the Janitorial Department.
J = $310,000 + (0.20 ? C)
The total costs of the Cafeteria Department will
include 50% of the Janitorial Departments costs,
which is the percent usage of Janitorial services
by the Cafeteria Department.
C = $169,000 + (0.50 ? J)
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Reciprocal Services Method
(slide 7 of 10)
The preceding yields two equations with two
unknowns, as follows:
Equation 1: J = $310,000 + (0.20 ? C)
Equation 2: C = $169,000 + (0.50 ? J)
Equation 2 can be rewritten in terms of J.
C = $169,000 + (0.50 ? J)
C $169,000 = 0.50 ? J
C $169, 000
= J
0.50
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Reciprocal Services Method
(slide 8 of 10)
J in Equation 1 can then be replaced, resulting
in the following equation:
Equation 3:
C $169,000
= $310,000 + (0.20 ? C)
0.50
Solving Equation 3 for C yields the following:
C $169,000
= $310,000 + (0.20 ? C)
0.50
C $169,000 = (0.50 ? $310,000) + (0.50 ? 0.20 ? C)
C = $169,000 + (0.50 ? $310,000) + (0.50 ? 0.20 ? C)
C = $169,000 + $155,000 + (0.10 ? C)
C (0.10 ? C) = $169,000 + $155,000
0.90 ? C = $324,000
