1. Prepared by Diane Tanner University of North Florida Chapter 15 1 Support Cost Allocation

2. Types of Departments  Producing/production/operating departments  Profit or cost centers  Add value to cost objects  Responsible for creating products or services to customers  Examples: assembly, finishing, packaging  Support/service departments  Cost centers  Provide support to other departments  Examples: IT, maintenance, payroll, HR, security 2

3. Cost Allocation Steps Three steps in allocating costs are: 1. Assign all costs to a support or producing department 2. Allocate support department costs to the producing departments, and 3. Allocate cost pools (consist of costs that will be indirect to cost objects) to units of individual products using traditional or ABC 3 After allocation, a producing department will contain two overhead components: Overhead directly associated with the production department Overhead allocated to the production department from support departments After allocation, a producing department will contain two overhead components: Overhead directly associated with the production department Overhead allocated to the production department from support departments

4. The Big Picture 4 Support Costs Product 1Product 2Product 3 Cost Pool 1Cost Pool 2 1. To be allocated to cost pools 2. To be allocated to cost objects Why allocate support costs? Without services provided, a manufacturing facility could not function. If a unit uses costs, it should be held responsible for them.

5. Methods of Allocating Costs of Multiple Support Departments  Direct method  Allocates support department costs to production departments only  Step-down method  Allocates support department costs to ‘some’ service departments and to production departments  Partially recognizes the mutual services provided among all service departments  Reciprocal method  Allocates support department costs to all service and production departments  Fully recognizes the mutual services provided among all services departments 5

6. 6 The End