2. The Need for Cost Allocations
Operating
Departments
Carry out the
central purposes
of an organization
Service
Departments
Provide support
to the
operating
departments
3. First, we identify the factor
that drives costs in the
service department.
This cost driver is used
as the allocation base.
The Need for Cost Allocations
How are service
department costs
charged to operating
departments?
4. The Need for Cost Allocations
Second, we measure the
consumption of the
allocation base in the
operating departments.
5. The Need for Cost Allocations
Third, we allocate
the service
department cost
based on the
relative amount of
the allocation base
used in each
operating department.
6. What happens to
service department
costs after they
are allocated to
operating
departments?
The Need for Cost Allocations
Allocated service department
costs become a part of
the overhead in each
operating department.
7. The Need for Cost Allocations
I get it. They become
a part of the overhead
that is applied to
products with a
predetermined
overhead rate.
That’s right. Take a look
at this flow chart.
I think it will summarize
our discussion of the
allocation process.
8. The Need for Cost Allocations
First Stage Allocations
Service department costs are
allocated to operating departments.Service
Department
(Cafeteria)
Service
Department
(Accounting)
Service
Department
(Personnel)
Operating
Department
(Machining)
Operating
Department
(Assembly)
The
Products
9. The Need for Cost Allocations
Service
Department
(Cafeteria)
Service
Department
(Accounting)
Service
Department
(Personnel)
Operating
Department
(Machining)
Operating
Department
(Assembly)
The
Products
Second Stage Allocations
Operating department overhead costs and
allocated service department costs are
applied to products.
10. Guidelines for Cost Allocation
Operating
Departments
Service
Departments
1. Allocation bases
2. Interdepartmental
services
3. Allocating costs
by behavior
4. Allocation pitfalls
to avoid
5. Allocation of
actual or
budgeted costs
$
11. Selecting Allocation Bases
Personnel:
Number of
employees
Receiving:
Units
handled
Security:
Square
footage
Power:
Kilowatt
hours
Cafeteria:
Number of
employees
Custodial:
Square
footage
Accounting:
Staff
hours
Criteria
Easiest
12. Selecting Allocation Bases
Availability
of space or
equipment
Personnel:
Number of
employees
Receiving:
Units
handled
Security:
Square
footage
Power:
Kilowatt
hours
Cafeteria:
Number of
employees
Custodial:
Square
footage
Accounting:
Staff
hours
Criteria
13. Selecting Allocation Bases
Benefits received
by the operating
department
Personnel:
Number of
employees
Receiving:
Units
handled
Security:
Square
footage
Power:
Kilowatt
hours
Cafeteria:
Number of
employees
Custodial:
Square
footage
Accounting:
Staff
hours
Criteria
14. Selecting Allocation Bases
Consumption of
resources
Personnel:
Number of
employees
Receiving:
Units
handled
Security:
Square
footage
Power:
Kilowatt
hours
Cafeteria:
Number of
employees
Custodial:
Square
footage
Accounting:
Staff
hours
Criteria
15. Interdepartmental Services
Problem
Allocating costs when service departments
provide services to each other
Problem
Allocating costs when service departments
provide services to each other
Solutions
Direct Method
Step method
Reciprocal method