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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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Chapter 15

Support Cost Allocation

Prepared by

Diane Tanner

University of North Florida


Why allocate support department costs
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
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 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
The Big Picture

1. Allocate to Cost Pools

2. Allocate to Cost Objects


Methods of allocating costs of multiple support departments
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



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