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    Departmental Overhead-Allocation of Support Departments To Operating Department

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    boerd77
    The document discusses how support department costs are allocated to operating departments. It explains that support departments provide services to other internal units and administrative departments provide management activities. The document also discusses different methods for allocating service costs, including the direct method, step method, and algebraic method.

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    Departmental Overhead-Allocation of Support Departments To Operating Department

    Uploaded by

    boerd77
    9 views10 pages
    The document discusses how support department costs are allocated to operating departments. It explains that support departments provide services to other internal units and administrative departments provide management activities. The document also discusses different methods for allocating service costs, including the direct method, step method, and algebraic method.

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    Departmental_Overhead

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    The document discusses how support department costs are allocated to operating departments. It explains that support departments provide services to other internal units and administrative departments provide management activities. The document also discusses different methods for allocating service costs, including the direct method, step method, and algebraic method.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    9 views10 pages

    Departmental Overhead-Allocation of Support Departments To Operating Department

    Uploaded by

    boerd77
    The document discusses how support department costs are allocated to operating departments. It explains that support departments provide services to other internal units and administrative departments provide management activities. The document also discusses different methods for allocating service costs, including the direct method, step method, and algebraic method.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
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    Departmental Overhead-

    Allocation of support departments


    to operating department
     Learning Objectives
     Why and how are support department costs
    allocated to operating departments?

    © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
    a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Service Department Cost Allocation

     Service departments  Administrative


    provide functional tasks departments provide
    for other internal units management activities
     Purchasing for the organization
     Maintenance  Human resources

     Engineering  Accounting

     Security  Legal

     Warehousing  Insurance

    © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
    a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Allocating Service Costs: Full Cost
    Objective
     Reasons for:  Reasons against:
     Cost recovery  Managers cannot
     Awareness of control costs
    support costs  Arbitrary costs not
     “Fair share” of costs useful in decision
    making
     Regulations for some
    pricing instances  Confuses costing
    and pricing issues

    © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
    a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Allocating Service Costs: Motivation
    for Managers Objective
     Reasons for:  Reasons against:
     Awareness of support  Distorts profits with
    costs in production subjective allocations
    managers  Managers cannot control
     Relates unit’s profit to costs
    total company profits  Not material to profits
     Reflects usage of  Creates interdivisional ill
    services will
     Encourages cost control  Not cost beneficial
     Encourages usage of
    certain services

    © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
    a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Allocating Service Costs: Compare
    Alternate Courses of Action Objective
     Reasons for:  Reasons against:
     Relevant information  Unnecessary if costs do
    helps compare not change among
    alternatives alternatives
     Provides best cost  Arbitrary allocations
    estimates when distort cash flow and
    comparing alternatives profits for alternatives

    © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
    a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Allocation Bases for Service
    Department Costs
     Rational and systematic base
     Benefit received by revenue-producing department
     Causal relationship
     Fairness or equity of the allocations
     Ability of revenue-producing department to bear the
    allocated cost
     Methods
     Direct method
     Step method
     Benefits-provided ranking
     Algebraic method
     Simultaneous equations

    © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
    a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Direct Method
    Assigns costs straight to revenue-producing areas

    Service Revenue
    1 2 A B C
    Step 1 P

    Step 2 P
    Does not recognize service provided
    to other service departments
    © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
    a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Service Method
    Partially recognizes relationships
    among service departments
    Service Revenue
    1 2 A B C
    Step 1 P

    Step 2 P
    Does not recognize the two-way exchange of
    services between service departments
    © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
    a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Algebraic Method Provides the best
    allocation
    information

    Service Revenue
    1 2 A B C
    At the P
    same
    time P

    Recognizes all interrelationships among departments

    © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
    a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Service Cost Allocation

     Allocated service department costs are


    included in the overhead application rate for
    the revenue-producing areas
     Service department costs are allocated to
    products or jobs through normal overhead
    assignment procedures

    © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in
    a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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