Chapter 15
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Chapter 15. Support Cost Allocation. Prepared by Diane Tanner University of North Florida. Why Allocate Support Department Costs?. Without services provided, a manufacturing facility could not function. Examples of services costs to be allocated Payroll Maintenance HR

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Prepared by Diane Tanner University of North Florida

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Chapter 15

Support Cost Allocation

Prepared by

Diane Tanner

University of North Florida


Why Allocate Support Department Costs?

  • Without services provided, a manufacturing facility could not function.

  • Examples of services costs to be allocated

    • Payroll

    • Maintenance

    • HR

    • Accounting services

    • Information technology

    • Housekeeping


Actual Vs Budget

  • Service department costs allocation bases

    • Actual rates

      • Ensure that all service department costs are allocated.

    • Budgeted rates

      • Provide service department managers incentives to control costs

      • Provide user departments more accurate information about service department billing rates for planning purposes

  • In either case, allocate using an allocation base that reflects a cause-and-effect relationship


Operating Vs. Service Departments

  • Operating (user) departments

    • Add value to products or services

    • Also called production departments

    • Examples

      • Assembly, machining, particular sales units, geographical units, testing

  • Service (support) departments

    • Provides support and assists operating departments and other service departments

    • Examples

      • Maintenance, IT, accounting, payroll, HR, housekeeping


The Big Picture

1. Allocate to Cost Pools

2. Allocate to Cost Objects


Methods of Allocating Costs of Multiple Support Departments

  • Direct method

    • Allocates support department costs to operating departments only

  • Step-down method

    • Allocates support department costs to ‘some’ service departments and to operating departments

    • Partially recognizes the mutual services provided among all service departments

  • Reciprocal method

    • Allocates support department costs to all service and operating departments

    • Fully recognizes the mutual services provided among all services departments


The End


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