Service Department Costing: An Activity Approach

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Service Department Costing An ActivityApproach

• Chapter Fifteen

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Reasons for Allocating Service Department Costs
To encourage operatingdepartments to wiselyuse
service departmentresources.
To provide operatingdepartments with
morecomplete cost datafor making decisions.
To help measure theprofitability of
operatingdepartments.
To create incentivefor service departmentsto
operate efficiently.
To value inventory for external
financialreporting purposes.
To include all overheadin the cost base when
cost-plus pricing is used.
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Selecting Allocation Bases
The allocation bases used shoulddrive the cost
being allocated. For example, when allocating
costsof the employee cafeteria, the numberof
meals served would be a goodchoice for the
allocation base.
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Selecting Allocation Bases
A service departments costs may beallocated
using more than one base. For example, a portion
of the human resource departmentcosts might be
allocated based on the number of employeesin
each operating department and another portion
might beallocated based on hours spent in
training employees ineach operating department.
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Examples of Allocation Bases
Exh. 15-1
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Interdepartmental Services
Problem Allocating costs when service
departmentsprovide services to each other
Solutions Direct Method Step Method Reciprocal
Method
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Direct Method
Service Department (Cafeteria)
Operating Department (Machining)
Service Department (Custodial)
Operating Department (Assembly)
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Direct Method Example
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Direct Method Example
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Direct Method Example
Allocation base Number of employees
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Direct Method Example
Allocation base Number of employees
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Direct Method Example
Allocation base Square feet occupied
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Direct Method Example
Allocation base Square feet occupied
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Step Method
Operating Department (Machining)
Service Department (Cafeteria)
Service Department (Custodial)
Operating Department (Assembly)
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Step Method

• There are three key points to understand
  regarding the step method
• ? In both the direct and step methods, any
  amount of the allocation base attributable
  to the service department whose cost is
  being allocated is always ignored.
• ? Any amount of the allocation base that is
  attributable to a service department whose cost
  has already been allocated is ignored.
• ? Each service department assigns its own costs
  to operating departments plus the costs that
  have been allocated to it from other service
  departments.

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Step Method Example
We will use the same data used in the direct
method example.
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Step Method Example
Allocate Cafeteria costs first sinceit provides
more service than Custodial.
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Step Method Example
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Step Method Example
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Step Method Example
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Step Method Example
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Step Method Example
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Step Method Example
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End of Chapter 15