Managing and Allocating Support-Service Costs Chapter 10

Productive vs. service functions  Productive functions  Generate revenue  Provide services/products to external customers  Service functions  Cost centers  Provide services to internal customers  Productive functions  Other service functions

Support/service departments  Organizational units providing support to other segments of the organization  Accounting  Human resources  Information technology  Maintenance  Purchasing  Etc.

Allocation of service costs  Why?  All costs must be covered  Service costs must be pushed down to productive functions  nternal charging  Promotes more efficient use of internal services  Compliance with contracts  Required reporting  Regulated industries, non-profits, etc.

Allocation of service costs  Identify costs to be allocated  Cost pools for distinct types of services or resources  Resources used, not resources supplied  Unused resources represent excess capacity  Should not be charged to service users

Allocation of service costs  Choose an appropriate allocation base for each type of service or resource  Rent, insurance, maintenanceSquare footage  Heating/coolingVolume of space  Accounting, data processing# of transactions  Human resources, payroll# of employees  Information technology# of computers  Purchasing# of purchase orders  Motor pool# of vehicles

Allocation methods  Direct method  Service costs allocated directly to productive functions  No inter-service function allocation  Ignores the services each service function provides to the other service functions

Direct method

Example

Direct method

Allocation methods  Step method  Most wide-spread service cost allocated to other service and productive functions  Next most wide-spread service cost is allocated to remaining service and productive functions  Recognizes some of the inter-service function services

Step method

One other method  Reciprocal method  Considers all inter-service department services  Most accurate  Allocation requires complex calculations  Beyond the scope of this course