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Service Department AllocationsAppendix 4B

4B-2

Operating Departments

An operating department carries out the central purpose of the organization.

An operating department carries out the central purpose of the organization.

The Surgery Department

at Mount Sinai

Hospital.

The Surgery Department

at Mount Sinai

Hospital.

The Production

Departments at

Mitsubishi.

The Production

Departments at

Mitsubishi.

The Geography Department

at the University of Washington.

The Geography Department

at the University of Washington.

4B-3

Service Departments

Service departments do not directly engage in operating activities.

Service departments do not directly engage in operating activities.

The Accounting Department at Macy’s.

The Accounting Department at Macy’s.

The Human Resources Department

at Walgreens.

The Human Resources Department

at Walgreens.

The Cafeteria at Genesco.

The Cafeteria at Genesco.

The Internal Audit Department at

Exxon.

The Internal Audit Department at

Exxon.

4B-4

Interdepartmental Services

ServiceDepartment

ServiceDepartment

OperatingDepartmentOperating

Department

Costs of the service department become overhead costs to

the operating department.

4B-5

Allocation Approaches

4B-6

Reciprocal Services

ServiceDepartment 1

ServiceDepartment 2

When service departments provide

services to each other we call them

reciprocal services.

4B-7

Learning Objective 10

Allocate service department costs to

operating departments using the direct method.

4B-8

Direct Method

Service Department(Cafeteria)

Service Department(Custodial)

Operating Department(Machining)

Operating Department(Assembly)

Interactionsbetween servicedepartments areignored and all

costs areallocated directly

to operatingdepartments.

Interactionsbetween servicedepartments areignored and all

costs areallocated directly

to operatingdepartments.

4B-9

Direct Method – An Example

Service Department Allocation Base

Cafeteria Number of employeesCustodial Square feet occupied

4B-10

Direct Method – An Example

How much of the Cafeteria and Custodial costs should be allocated to each operating department

using the direct method of cost allocation?

4B-11

Direct Method – An Example

Allocation base: Number of employees Allocation base: Number of employees

4B-12

Direct Method – An Example

Allocation base: Number of employees

$360,000 ×30

20 + 30= $216,000

4B-13

Direct Method – An Example

Allocation base: Square feet occupied Allocation base: Square feet occupied

$90,000 ×25,000

25,000 + 50,000 = $30,000

4B-14

Direct Method – An Example

Allocation base: Square feet occupied Allocation base: Square feet occupied

4B-15

Learning Objective 11

Allocate service department costs to

operating departments using the step-down

method.

4B-16

Operating Department(Machining)

Operating Department(Assembly)

Step-Down Method

Service Department(Cafeteria)

Service Department(Custodial)

Once a servicedepartment’s costs

are allocated, other service

department costsare not allocated

back to it.

4B-17

Step-Down Method There are three key points to understand regarding the

step-down method: In both the direct and step-down 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.

4B-18

Service Department Allocation Base

Cafeteria Number of employeesCustodial Square feet occupied

Recall the data used in the direct method example.Recall the data used in the direct method example.

Step-Down Method – An Example

4B-19

Allocate Cafeteria costs first sinceit provides more service than Custodial.

Allocate Cafeteria costs first sinceit provides more service than Custodial.

Step-Down Method – An Example

4B-20

$360,000 ×10

10 + 20 + 30= $60,000

Allocation base: Number of employees Allocation base: Number of employees

Step-Down Method – An Example

4B-21

$360,000 ×20

10 + 20 + 30= $120,000

Allocation base: Number of employees Allocation base: Number of employees

Step-Down Method – An Example

4B-22

$360,000 ×30

10 + 20 + 30= $180,000

Allocation base: Number of employees Allocation base: Number of employees

Step-Down Method – An Example

4B-23

New total = $90,000 original Custodial cost plus $60,000 allocated from the Cafeteria.

Step-Down Method – An Example

4B-24

$150,000 ×25,000

25,000 + 50,000 = $50,000

Allocation base: Square feet occupied Allocation base: Square feet occupied

Step-Down Method – An Example

4B-25

$150,000 ×50,000

25,000 + 50,000 = $100,000

Allocation base: Square feet occupied Allocation base: Square feet occupied

Step-Down Method – An Example

4B-26

Reciprocal Method

Interdepartmentalservices are given

full recognitionrather than partialrecognition as withthe step method.

Service Department(Cafeteria)

Service Department(Custodial)

Operating Department(Machining)

Operating Department(Assembly)

Because of its mathematical complexity, the reciprocal method is rarely used.

Because of its mathematical complexity, the reciprocal method is rarely used.

4B-27

Quick Check Datafor Direct and Step-Down Methods

Allocation bases:Business school administration costs (ADMIN): Number of employees

Business Administration computer services (BACS): Number of personal computers

The direct method of allocation is used.

4B-28

Quick Check How much cost will be allocated from

Administration to Accounting?a. $ 36,000b. $144,000c. $180,000d. $ 27,000

4B-29

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

Quick Check

$180,000 ×20

20 + 80= $36,000

4B-30

Quick Check How much total cost will be allocated from

ADMIN and BACS combined to the Accounting Department?a. $ 52,500b. $135,000c. $270,000d. $ 49,500

4B-31

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

Quick Check

4B-32

Quick Check Data

Allocation bases:Business school administration costs (ADMIN): Number of employees

Business administration computer services (BACS): Number of personal computers

Allocation bases:Business school administration costs (ADMIN): Number of employees

Business administration computer services (BACS): Number of personal computers

The step-down method of allocation is used.

4B-33

Quick Check How much total cost will be allocated from

ADMIN and BACS combined to the Accounting Department?a. $35,250b. $49,072c. $18,000d. $26,333

4B-34

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

Quick Check

4B-35

End of Appendix 4B