Key Topics:

1
Chapter 8Measuring and Assigning Support
Department Costs

• Key Topics
• Operating and support departments
• Cost allocation methods
• Single versus dual rate allocations
• Uncertainties in and quality of allocation
  information

2
What Are Support Departments, andWhy Are Their
Costs Allocated to Other Departments?

• Operating Departments
• Operating departments are the departments or
  divisions within an organization that manufacture
  goods or produce services for external customers
  or clients.
• Support Departments
• Support departments provide services internal to
  the organization and that support the operating
  departments

3
Objectives for Allocating Support Department Costs
4
What Process Is Used to Allocate Support
Department Costs?

• 1. Clarify the purpose of the allocation
• 2. Identify support and operating department cost
  pools
• 3. Assign costs to cost pools
• 4. For each support department cost pool, choose
  an allocation base
• 5. Choose and apply a method for allocating
  support department costs to operating departments
• 6. If relevant, allocate support costs from the
  operating departments to units of goods or
  services.

5
Allocation from Support Departments to Operating
Departments and Then to Units of Goods or Services
6
Direct Method

• Each support department's cost is allocated to
  only the operating departments.
• Pros and Cons
• Easiest method computationally, but computers
  make this factor less important
• Easy to explain to managers and others
• Ignores interactions among support departments

7
Step-Down Method

• Support department costs are allocated one
  department at a time to remaining support and
  operating departments in a cascading manner until
  all support department costs have been allocated.
• Pros and Cons
• Requires ranking of support departments in
  terms of services provided to other support
  departments
• Moderately easy computations, depending on the
  number of support departments
• Moderately easy to explain to managers and
  others
• Takes into account some of the interactions
  among support departments

8
Reciprocal Method

• Support department costs are simultaneously
  allocated among support departments.
• Support department costs, including interactions,
  are allocated to operating departments.
• Pros and Cons
• Computationally the most complex, but computers
  simplify the process
• May be difficult to explain to managers and
  others
• Most accurate allocation method, because it
  takes into account all of the interactions among
  support departments

9
Lake County Library
10
Using the Methods
11
What Is the Difference Between Single and
Dual-Rate Allocations?

• Single Rate Allocation
• Use only one base to allocate both fixed and
  variable costs
• Dual Rate Allocation
• Accumulate in separate cost pools and use
  different allocation bases for fixed and variable
  costs
• Pros and Cons of Dual Rate Allocation
• Reduces mismeasurement of allocation
• Reduces misunderstandings about the behavior of
  support costs
• Costs more to develop and maintain
• May introduce additional mismeasurement from
  problems in classifying costs as fixed and
  variable

12
Uncertainties

• Identifying support and operating cost pools
• Assigning costs to cost pools
• Selecting allocation bases
• Choosing an allocation method
• Measuring the degree of services provided among
  support departments (step-down and reciprocal
  methods)

13
Ways to Improve the Quality of Information

• Dual rate allocations
• Redesign of accounting system for cost pools and
  allocation bases
• Choices regarding estimated versus actual support
  costs and rates
• Consideration of perceived fairness
• Imposition of allocation rules by contracting
  parties
• Replacement of cost-based payments with fixed fee
  payments