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Service Department Allocations

Service Department Allocations. Appendix 4B. Operating Departments. An operating department carries out the central purpose of the organization. The Geography Department at the University of Washington. The Surgery Department at Mount Sinai Hospital.

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Service Department Allocations

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  1. Service Department Allocations Appendix 4B

  2. Operating Departments Anoperating department carries out the central purpose of the organization. The Geography Department at the University of Washington. The Surgery Department at Mount Sinai Hospital. The Production Departments at Mitsubishi.

  3. Service Departments Service departments do not directly engage in operating activities. The Accounting Department at Macy’s. The Human Resources Department at Walgreens. The Cafeteria at Genesco. The Internal Audit Department at Exxon.

  4. Interdepartmental Services ServiceDepartment OperatingDepartment Costs of the service department become overhead costs to the operating department.

  5. DirectMethod  Step-DownMethod  ReciprocalMethod Allocation Approaches

  6. Reciprocal Services ServiceDepartment 1 ServiceDepartment 2 When service departments provide services to each other we call them reciprocal services.

  7. Learning Objective 10 Allocate service department costs to operating departments using the direct method.

  8. Direct Method Service Department (Cafeteria) Operating Department (Machining) Interactionsbetween service departments areignored and all costs areallocated directlyto operatingdepartments. Service Department (Custodial) Operating Department (Assembly)

  9. Direct Method – An Example

  10. Direct Method – An Example How much of the Cafeteria and Custodial costs should be allocated to each operating department using the direct method of cost allocation?

  11. 20 20 + 30 $360,000 × = $144,000 Direct Method – An Example Allocation base: Number of employees

  12. 30 20 + 30 $360,000 × = $216,000 Direct Method – An Example Allocation base: Number of employees

  13. 25,000 25,000 + 50,000 $90,000 × = $30,000 Direct Method – An Example Allocation base: Square feet occupied

  14. 50,000 25,000 + 50,000 $90,000 × = $60,000 Direct Method – An Example Allocation base: Square feet occupied

  15. Learning Objective 11 Allocate service department costs to operating departments using the step-down method.

  16. Step-Down Method Service Department (Cafeteria) Operating Department (Machining) Once a servicedepartment’s costsare allocated, other servicedepartment costsare not allocatedback to it. Service Department (Custodial) Operating Department (Assembly)

  17. There are three key points to understand regarding the step-down method: In both the direct and step-down methods, any amount of the allocation base attributable to the service department whose cost is being allocated is always ignored.  Any amount of the allocation base that is attributable to a service department whose cost has already been allocated is ignored. Each service department assigns its own costs to operating departments plus the costs that have been allocated to it from other service departments. Step-Down Method

  18. Step-Down Method – An Example Recall the data used in the direct method example.

  19. Step-Down Method – An Example Allocate Cafeteria costs first sinceit provides more service than Custodial.

  20. 10 10 + 20 + 30 $360,000 × = $60,000 Allocation base: Number of employees Step-Down Method – An Example

  21. 20 10 + 20 + 30 $360,000 × = $120,000 Allocation base: Number of employees Step-Down Method – An Example

  22. 30 10 + 20 + 30 $360,000 × = $180,000 Allocation base: Number of employees Step-Down Method – An Example

  23. New total = $90,000 original Custodial cost plus $60,000 allocated from the Cafeteria. Step-Down Method – An Example

  24. 25,000 25,000 + 50,000 $150,000 × = $50,000 Allocation base: Square feet occupied Step-Down Method – An Example

  25. 50,000 25,000 + 50,000 $150,000 × = $100,000 Allocation base: Square feet occupied Step-Down Method – An Example

  26. Reciprocal Method Service Department (Cafeteria) Operating Department (Machining) Interdepartmentalservices are givenfull recognitionrather than partialrecognition as withthe step method. Service Department (Custodial) Operating Department (Assembly) Because of its mathematical complexity, the reciprocal method is rarely used.

  27. Quick Check Datafor Direct and Step-Down Methods The direct method of allocation is used. • Allocation bases: • Business school administration costs (ADMIN):Number of employees • Business Administration computer services (BACS):Number of personal computers

  28. How much cost will be allocated from Administration to Accounting? a. $ 36,000 b. $144,000 c. $180,000 d. $ 27,000 Quick Check 

  29. 20 20 + 80 $180,000 × = $36,000 Quick Check  How much cost will be allocated from Administration to Accounting? a. $ 36,000 b. $144,000 c. $180,000 d. $ 27,000

  30. How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department? a. $ 52,500 b. $135,000 c. $270,000 d. $ 49,500 Quick Check 

  31. 18 18 + 102 $90,000 × = $13,500 Quick Check  How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department? a. $ 52,500 b. $135,000 c. $270,000 d. $ 49,500

  32. Quick Check Data The step-down method of allocation is used. • Allocation bases: • Business school administration costs (ADMIN):Number of employees • Business administration computer services (BACS):Number of personal computers

  33. How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department? a. $35,250 b. $49,072 c. $18,000 d. $26,333 Quick Check 

  34. Quick Check  How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department? a. $35,250 b. $49,072 c. $18,000 d. $26,333

  35. End of Chapter 4

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