Chapter 8 – Measuring and Assigning Support Department Costs
Support Department Cost Allocation
- Common cost: cost of a resources that is shared between 2+ depts.
- Operating departments: depts./divisions that mfg goods/services for external customers or clients
o Mfg: produce
o Service: produce services
o Retail: sell merch
- Support department: depts. that provide internal services to operating depts.
o Staff cafeteria
o Human resources
Objectives for Support Department Cost Allocation
- Treated as period expenses under GAAP → allocated for objectives other than f/s reporting
- Costs form support services may need to be allocated (to value the savings, or for outsiders)
- Managers are responsible for their dept’s use of support services (& managers of support services are responsible for
their dept costs) → an effective allocation system will promote both sets of managers to be efficient
The Process of Allocating Support Department Costs
1. Clarify the purpose of the allocation
2. Identify support & operating dept cost pools
a. Departments are usually used as cost pols because organizations already accumulate costs by dept
b. Another factor: ability to identify an appropriate allocation base
c. Separating support costs = more accurate cost allocations (in general)
3. Assign costs to cost pools
a. Many costs can be directly traced (employee salaries, supplies)
b. Facilities costs – insurance, utilities, prop. tax, maintenance – traced to cost pool then allocated among all
support and op depts
4. For each support dept cost pool, choose an allocation base
a. Best: cost driver
b. Chosen to reflect some of the activities provided
5. Choose and apply a method for allocating support dept costs to operating depts.
a. Direct method
b. Step-down method
c. Reciprocal method
6. If relevant, allocate support costs from operating d1epts. to units of goods/services
The Direct Method
- Allocate the costs of all support depts. to the operating department only
- Interaction between support depts. are not reflected
- Use the support department’s allocation base to allocate the costs to each op depts.
- Calculate the % of each support depts. cost allocated to each op depts.
- Allocate support dept. costs of one dept. at a time to remaining support and op depts.
- Cascading manner – until all support department costs are allocated
- First rank each support department according to the amount of service provided to other support depts.
- Cost of the 1 dept chosen is allocated to the remaining depts
The Reciprocal method of Allocation
- Simultaneously allocates costs among support depts. and then from support depts. to op depts.
- Performed in 2 phases – first support costs allocated among each other
- Create a set of equations to solve simultaneously
- The allocated costs for each support dept includes costs allocated from other support depts.
- Next, the new total cost per support dept is allocated to all other depts. (support & op) Single- vs. Dual-Rate Allocations
- Single-rate allocation: using only one base to allocate both fixed and var costs
o Likely mismeasures resources sued because the same base is inappropriate for all costs
- Dual-rate allocation: support costs are separated to fixed and var costs pools and cost drivers and identified for the var
o More accurately reflects the flow of resources
o Drawback: costs more to develop & maintain
Support Cost Allocation, Info Quality & Decision Making
Relevant Support Costs for Decision Making
- Relevant support costs are difficult to measure