AFM481 - Advanced Cost Accounting
Professor Grant Russell
Final Exam Material
Chapter 8: Measuring and Assigning Support Department Costs
A Common Cost or Indirect, Overhead or Joint Cost is the cost for a resource that is shared
among 2 or more departments.
Support Departments provide services internal to the organization that support the operating
departments. (e.g. accounting, info systems, HR, marketing, R&D and admin) – treated as period
How to Allocate Support Department Costs
1. Identify the support and operating department cost pools.
2. Assign costs to cost pools.
3. For each support department cost pool, choose an allocation base.
Allocation base for purchasing department costs: $ dollar amount of purchases
Allocation base for HR and accounting activities: # of employees or time spent
Allocation base for laundry department: Kilograms of laundry
4. Choose and apply a method for allocating support department costs to operating departments.
5. If relevant, allocate support costs from the operating departments to units of goods or services.
Direct Method Allocation (Using an Allocation Base):
Allocates the costs of all support departments to the operating departments only
No costs are allocated among support departments. No interactions among support
departments are reflected in this method.
Step-Down Method of Allocation (Using an Allocation Base):
Allocates support department costs one department at a time to remaining support and
operating departments in a cascading manner until all support department costs have been
Begin by ranking each support department according to the amount of service provided to
other support departments. Then, costs for the first support department chosen are allocated
to the remaining departments, both support and operating.
Reciprocal Method of Allocation (Using an Allocation Base):
Allocates costs among support departments first, and then from support departments to
Allows for all the interactions among departments. Reflects support department interactions
most accurately. 1. Allocating Support Costs Among Support Departments
10 employees outside the admin department; 2 of them work in custodial services:
Custodial Services = $60,360 + 0.2 (Administration)
o Because 2/10 of administration cost would be allocated to custodial services
Of the 990 square metres that are not in custodial services, 90 square metres are in administration.
Administration = $98,240 + 0.09 (Custodial Services)
o Because 90/990 of custodial services would be allocated to administration
Custodial Services = $60,360 + 0.2 [$98,240 + (0.09 * Custodial Services)]
Custodial Services = $81,475; Administration = $105,573
2. Allocating Support Costs to Operating Departments
Administration Custodial Instrument Music Lessons Total
Square Metres 90 800 100 990
Employees 2 5 3 10
Department Cost $98,240 $60,360 $263,800 $93,600 $516,000
Allocation of 81,475 * ($81,475) 81,475 * 81,475 * 100/990
Custodial 90/990 = 7,333 800/990 = = 8,147
Allocation of ($105,573) 105,573 * 105,573 * 5/10 = 105,573 * 3/10 =
Administration 2/10 = $52,786 $31,672
Total Allocated $0 $0 $382,581 $133,419 $516,000
Single-Rate Allocation: using only one base to allocate both fixed and variable costs; lik