1. ALLOCATION OF SUPPORT- DEPARTMENT COSTS
CHAPTER 15
ALLOCATION OF SUPPORT- DEPARTMENT COSTS

2. Allocating Costs of a Supporting Department to Operating Departments
Supporting (Service) Department – provides the services that assist other internal departments in the company
Operating (Production) Department – directly adds value to a product or service
Service Department
(Canteen)
(Maintenance)
Operating Department
(Machining)
(Assembly)

3. Methods to allocate support department costs
Single-rate method
Dual-rate method
Allocates costs in each cost pool (service department) to cost objects (production departments) using the same rate per unit of a single allocation base
No distinction is made between fixed and variable costs in this method
Segregates costs within each cost pool into two segments: a variable-cost pool and a fixed-cost pool.
Each pool uses a different cost-allocation base

4. Allocation Bases
Under either method, allocation of support costs can be based on one of the three following scenarios:
Budgeted overhead rate and budgeted hours
Budgeted overhead rate and actual hours
Actual overhead rate and actual hours
Choosing between actual and budgeted rates: budgeted is known at the beginning of the period, while actual will not be known with certainty until the end of the period

5. Methods of Allocating Support Costs to Production Departments
Service Department
(Canteen)
(Maintenance)
Operating Department
(Machining)
(Assembly)
Direct
Step-Down
Reciprocal

6. Direct Method Allocates support costs only to Operating Departments
No Interaction between Support Departments prior to allocation

7. Direct Method Service Department (Canteen) (Maintenance)
Operating Department
(Machining)
(Assembly)
Interactions between service
departments are ignored and all
costs are allocated directly to operating departments.

8. Direct Method Example

9. Direct Method Example

10. Step-Down Method
Allocates support costs to other support departments and to operating departments that partially recognizes the mutual services provided among all support departments
One-Way Interaction between Support Departments prior to allocation

11. Step Method Service Department (Canteen) Operating Department
(Machining)
Once a service department’s costs are allocated, other service department costs are not allocated back to it.
Service Department
(Maintenance)
Operating Department
(Assembly)

12. Step Method Service Department (Canteen) Operating Department
(Machining)
Maintenance will have a new total to allocate to operating departments; its own costs plus those costs allocated from the Canteen.
Service Department
(Maintenance)
Operating Department
(Assembly)

13. Step Method Example

14. Reciprocal Method
Allocates support department costs to operating departments by fully recognizing the mutual services provided among all support departments
Full Two-Way Interaction between Support Departments prior to allocation

15. Reciprocal Method Service Department (Canteen) Operating Department
(Machining)
Interdepartmental services are given full recognition rather than partial recognition as with the step method.
Service Department
(Maintenance)
Operating Department
(Assembly)
Because of its mathematical complexity, the reciprocal method is rarely used.

16. Reciprocal Method Example

17. Choosing Between Methods
Reciprocal is the most precise
Direct and Step-Down are simple to compute and understand
Direct Method is widely used

18. End of Chapter 15
End of Chapter 15.