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The Need for Cost Allocations First Stage Allocations Service department costs are allocated to operating departments. Service Department (Cafeteria) Service.

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Presentation on theme: "The Need for Cost Allocations First Stage Allocations Service department costs are allocated to operating departments. Service Department (Cafeteria) Service."— Presentation transcript:

1 The Need for Cost Allocations First Stage Allocations Service department costs are allocated to operating departments. Service Department (Cafeteria) Service Department (Accounting) Service Department (Personnel) Operating Department (Machining) Operating Department (Assembly) The Products Next Page Click Here

2 The Need for Cost Allocations Service Department (Cafeteria) Service Department (Accounting) Service Department (Personnel) Operating Department (Machining) Operating Department (Assembly) The Products Next Page Click Here Second Stage Allocations Operating department overhead costs and allocated service department costs are applied to products.

3 Interdepartmental Services Problem Allocating costs when service departments provide services to each other Problem Allocating costs when service departments provide services to each other Solutions Direct Method Step Method Reciprocal Method Covered here Next Page Click Here

4 The Step Method - A Sequential Process The step method is sequential. The sequence typically begins with the service department that provides the greatest amount of service to other service departments. Next Page Click Here

5 Operating Department (Machining) Operating Department (Assembly) Step Method Step Method Once a service department’s costs are allocated, other service department costs are not allocated back to it. Service Department (Cafeteria) Service Department (Custodial) Next Page Click Here Custodial will have a new total to allocate to operating departments: its own costs plus those costs allocated from the cafeteria.

6 Step Method Example Next Page Click Here

7 Step Method Example $360,000 × 10 10 + 20 + 30 = $60,000 Allocation base: Number of employees Next Page Click Here

8 Step Method Example $360,000 × 20 10 + 20 + 30 = $120,000 Allocation base: Number of employees Next Page Click Here

9 Step Method Example $360,000 × 30 10 + 20 + 30 = $180,000 Allocation base: Number of employees Next Page Click Here

10 Step Method Example New total = $90,000 original custodial cost plus $60,000 allocated from the cafeteria. Next Page Click Here

11 Step Method Example $150,000 × 25,000 25,000 + 50,000 = $50,000 Allocation base: Square feet occupied Next Page Click Here

12 Step Method Example $150,000 × 50,000 25,000 + 50,000 = $100,000 Allocation base: Square feet occupied Next Page Click Here

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