Service Department Costing: An Activity Approach

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Service Department Costing An Activity Approach
Chapter 15
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The Need for Cost Allocations
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The Need for Cost Allocations
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The Need for Cost Allocations
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The Need for Cost Allocations
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The Need for Cost Allocations
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The Need for Cost Allocations
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The Need for Cost Allocations
Service Department (Cafeteria)
Operating Department (Machining)
Service Department (Accounting)
The Products
Operating Department (Assembly)
Service Department (Personnel)
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The Need for Cost Allocations
Service Department (Cafeteria)
Operating Department (Machining)
Service Department (Accounting)
The Products
Operating Department (Assembly)
Service Department (Personnel)
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Guidelines for Cost Allocation
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Selecting Allocation Bases
Personnel Number ofemployees
Custodial Squarefootage
Receiving Unitshandled
Cafeteria Number ofemployees
Security Squarefootage
Power Kilowatthours
Accounting Staffhours
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Selecting Allocation Bases
Personnel Number ofemployees
Custodial Squarefootage
Receiving Unitshandled
Cafeteria Number ofemployees
Security Squarefootage
Power Kilowatthours
Accounting Staffhours
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Selecting Allocation Bases
Personnel Number ofemployees
Custodial Squarefootage
Receiving Unitshandled
Cafeteria Number ofemployees
Security Squarefootage
Power Kilowatthours
Accounting Staffhours
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Selecting Allocation Bases
Personnel Number ofemployees
Custodial Squarefootage
Consumption of resources
Receiving Unitshandled
Cafeteria Number ofemployees
Security Squarefootage
Power Kilowatthours
Accounting Staffhours
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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
Service Department (Cafeteria)
Operating Department (Machining)
Service Department (Custodial)
Operating Department (Assembly)
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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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Reciprocal Method
Service Department (Cafeteria)
Operating Department (Machining)
Service Department (Custodial)
Operating Department (Assembly)
Because of its mathematical complexity, the
reciprocal method is rarely used.
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Comparison of Methods
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Quick Check Data
The direct method of allocation is used.

• Allocation bases
• Business school administration costs (ADMIN)
  Number of employees
• Business administration computer services
  (BACS) Number of personal computers

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Quick Check ?

• How much cost will be allocated from
  Administration to Accounting?
• a. 36,000
• b. 144,000
• c. 180,000
• d. 27,000

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Quick Check ?

• How much cost will be allocated from
  Administration to Accounting?
• a. 36,000
• b. 144,000
• c. 180,000
• d. 27,000

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Quick Check ?

• How much total cost will be allocated from
  ADMIN and BACS combined to the Accounting
  Department?
• a. 52,500
• b. 135,000
• c. 270,000
• d. 49,500

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Quick Check ?

• How much total cost will be allocated from
  ADMIN and BACS combined to the Accounting
  Department?
• a. 52,500
• b. 135,000
• c. 270,000
• d. 49,500

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Quick Check Data
The step method of allocation is used.

• Allocation bases
• Business school administration costs (ADMIN)
  Number of employees
• Business administration computer services
  (BACS) Number of personal computers

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Quick Check ?

• How much total cost will be allocated from
  ADMIN and BACS combined to the Accounting
  Department?
• a. 35,250
• b. 49,072
• c. 18,000
• d. 26,333

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Quick Check ?

• How much total cost will be allocated from
  ADMIN and BACS combined to the Accounting
  Department?
• a. 35,250
• b. 49,072
• c. 18,000
• d. 26,333

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Allocating Fixed Costs
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Allocating Fixed Costs
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Allocating Costs by Behavior
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Allocating Costs by Behavior
Allocatebudgeted amountsto operating
departmentsin proportion to thepeak-period
capacityrequired by the operating department.
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Allocating Costs by Behavior
Allocations are made at the beginning of
theperiod to provide data for predetermined
overhead rates and flexible budgets. Allocations
are made at the end of the period to provide
data for comparing actualperformance to planned
performance.
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Allocating Costs by BehaviorExample
SimCo has a maintenance department and two
operatingdepartments cutting and assembly.
Variable maintenancecosts are budgeted at 0.60
per machine hour. Fixedmaintenance costs are
budgeted at 200,000 per year.Data relating to
the current year are
Allocate maintenance costs to the two operating
departments.
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Allocating Costs by BehaviorExample Beginning
of the Period
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Allocating Costs by BehaviorExample Beginning
of the Period
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Allocating Costs by BehaviorExample End of the
Period
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Allocating Costs by BehaviorExample End of the
Period
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Allocating Costs by BehaviorExample
Fixed cost allocations are the same at the end
and at the beginning because they are based on
capacity instead of usage.
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Quick Check Data
Foster City has an ambulance service that is used
by the two public hospitals in the city. Variable
ambulance costs are budgeted at 4.20 per mile.
Fixed ambulance costs are budgeted at 120,000
per year. Data relating to the current year are
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Quick Check ?

• How much ambulance service cost will be
  allocated to Mercy Hospital at the beginning of
  the year?
• a. 117,000
• b. 254,400
• c. 114,480
• d. 119,250

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Quick Check ?

• How much ambulance service cost will be
  allocated to Mercy Hospital at the beginning of
  the year?
• a. 117,000
• b. 254,400
• c. 114,480
• d. 119,250

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Quick Check ?

• How much ambulance service cost will be
  allocated to Mercy Hospital at the end of the
  year?
• a. 114,000
• b. 118,800
• c. 110,400
• d. 121,200

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Quick Check ?

• How much ambulance service cost will be
  allocated to Mercy Hospital at the end of the
  year?
• a. 114,000
• b. 118,800
• c. 110,400
• d. 121,200

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Allocation Pitfalls to Avoid
Pitfall 1 Using salesdollars as anallocation
base
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Allocation Pitfalls to Avoid
Pitfall 2 Allocating fixed costs using a
variableactivity allocationbase
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End of Chapter 15