Service Department Allocations

Appendix 4B

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright2012byTheMcGrawHillCompanies,Inc.Allrightsreserved.
 4B-2

Operating Departments
An operating department carries out
the central purpose of the organization.

The
The Surgery Geography The
Department Department Production
at Mount at the Departments
Sinai University of at
Hospital. Washington. Mitsubishi.
 4B-3

Service Departments
Service
Service departments
departments dodo not
not directly
directly
engage
engage in
in operating
operating activities.
activities.

The The Human

Accounting Resources
Department Department
at Macys. at Walgreens.
The Cafeteria The Internal Audit
at Genesco. Department at
Exxon.
 4B-4

Interdepartmental Services

Service Operating
Department Department
Costs of the service
department become
overhead costs to
the operating
department.
 4B-5

Allocation Approaches
 4B-6

Reciprocal Services

Service Service
Department 1 Department 2
When service
departments provide
services to each
other we call them
reciprocal services.
 4B-7

Learning Objective 10

Allocate service
department costs to
operating departments
using the direct method.
 4B-8

Direct Method
Service Operating
Interactions Department Department
between service (Cafeteria) (Machining)
departments are
ignored and all
costs are
allocated directly
to operating Service Operating
departments. Department Department
(Custodial) (Assembly)
 4B-9

Direct Method An Example

Service Departments Operating Departments

Cafeteria Custodial Machining Assembly
Departmental costs
before allocation $ 360,000 $ 90,000 $ 400,000 $ 700,000
Number of employees 15 10 20 30
Square feet occupied 5,000 2,000 25,000 50,000
 4B-10

Direct Method An Example

Service Departments Operating Departments
Cafeteria Custodial Machining Assembly
Departmental costs
before allocation $ 360,000 $ 90,000 $ 400,000 $ 700,000
Cafeteria allocation ? ? ?
Custodial allocation ? ? ?
Total after allocation ? ? ? ?

How much of the Cafeteria and Custodial costs

should be allocated to each operating department
using the direct method of cost allocation?
 4B-11

Direct Method An Example

Service Departments Operating Departments
Cafeteria Custodial Machining Assembly
Departmental costs
before allocation $ 360,000 $ 90,000 $ 400,000 $ 700,000
Cafeteria allocation (360,000) 144,000 ?
Custodial allocation ? ? ?
Total after allocation $ 0 ? ? ?

Allocation base: Number of employees

 4B-12

Direct Method An Example

Service Departments Operating Departments
Cafeteria Custodial Machining Assembly
Departmental costs
before allocation $ 360,000 $ 90,000 $ 400,000 $ 700,000
Cafeteria allocation (360,000) 144,000 216,000
Custodial allocation ? ? ?
Total after allocation $ 0 ? ? ?

30
$360,000 = $216,000
20 + 30

Allocation base: Number of employees

 4B-13

Direct Method An Example

Service Departments Operating Departments
Cafeteria Custodial Machining Assembly
Departmental costs
before allocation $ 360,000 $ 90,000 $ 400,000 $ 700,000
Cafeteria allocation (360,000) 144,000 216,000
Custodial allocation (90,000) 30,000 ?
Total after allocation $ 0 $ 0 $ 574,000 ?

25,000
$90,000 = $30,000
25,000 + 50,000

Allocation base: Square feet occupied

 4B-14

Direct Method An Example

Service Departments Operating Departments
Cafeteria Custodial Machining Assembly
Departmental costs
before allocation $ 360,000 $ 90,000 $ 400,000 $ 700,000
Cafeteria allocation (360,000) 144,000 216,000
Custodial allocation (90,000) 30,000 60,000
Total after allocation $ 0 $ 0 $ 574,000 $ 976,000

Allocation base: Square feet occupied

 4B-15

Learning Objective 11

Allocate service
department costs to
operating departments
using the step-down
method.
 4B-16

Step-Down Method
Service Operating
Department Department
Once a service (Cafeteria) (Machining)
departments costs
are allocated,
other service
department costs
are not allocated
back to it.
Service Operating
Department Department
(Custodial) (Assembly)
 4B-17

Step-Down Method
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.
 4B-18

Step-Down Method An Example

Recall the data used in the direct method example.

Service Departments Operating Departments

Cafeteria Custodial Machining Assembly
Departmental costs
before allocation $ 360,000 $ 90,000 $ 400,000 $ 700,000
Number of employees 15 10 20 30
Square feet occupied 5,000 2,000 25,000 50,000
 4B-19

Step-Down Method An Example

Service Departments Operating Departments
Cafeteria Custodial Machining Assembly
Departmental costs
before allocation $ 360,000 $ 90,000 $ 400,000 $ 700,000
Cafeteria allocation ? ? ? ?
Custodial allocation ? ? ?
Total after allocation ? ? ? ?

Allocate
Allocate Cafeteria
Cafeteria costs
costs first
first since
since
itit provides
provides more
more service
service than
than Custodial.
Custodial.
 4B-20

Step-Down Method An Example

Service Departments Operating Departments
Cafeteria Custodial Machining Assembly
Departmental costs
before allocation $ 360,000 $ 90,000 $ 400,000 $ 700,000
Cafeteria allocation (360,000) 60,000 ? ?
Custodial allocation ? ? ?
Total after allocation $ 0 ? ? ?

10
$360,000 = $60,000
10 + 20 + 30

Allocation base: Number of employees

 4B-21

Step-Down Method An Example

Service Departments Operating Departments
Cafeteria Custodial Machining Assembly
Departmental costs
before allocation $ 360,000 $ 90,000 $ 400,000 $ 700,000
Cafeteria allocation (360,000) 60,000 120,000 ?
Custodial allocation ? ? ?
Total after allocation $ 0 ? ? ?

20
$360,000 = $120,000
10 + 20 + 30

Allocation base: Number of employees

 4B-22

Step-Down Method An Example

Service Departments Operating Departments
Cafeteria Custodial Machining Assembly
Departmental costs
before allocation $ 360,000 $ 90,000 $ 400,000 $ 700,000
Cafeteria allocation (360,000) 60,000 120,000 180,000
Custodial allocation ? ? ?
Total after allocation $ 0 ? ? ?

30
$360,000 = $180,000
10 + 20 + 30

Allocation base: Number of employees

 4B-23

Step-Down Method An Example

Service Departments Operating Departments
Cafeteria Custodial Machining Assembly
Departmental costs
before allocation $ 360,000 $ 90,000 $ 400,000 $ 700,000
Cafeteria allocation (360,000) 60,000 120,000 180,000
Custodial allocation (150,000) ? ?
Total after allocation $ 0 $ 0 ? ?

New total = $90,000 original Custodial cost

plus $60,000 allocated from the Cafeteria.
 4B-24

Step-Down Method An Example

Service Departments Operating Departments
Cafeteria Custodial Machining Assembly
Departmental costs
before allocation $ 360,000 $ 90,000 $ 400,000 $ 700,000
Cafeteria allocation (360,000) 60,000 120,000 180,000
Custodial allocation (150,000) 50,000 ?
Total after allocation $ 0 $ 0 $ 570,000 ?

25,000
$150,000 = $50,000
25,000 + 50,000

Allocation base: Square feet occupied

 4B-25

Step-Down Method An Example

Service Departments Operating Departments
Cafeteria Custodial Machining Assembly
Departmental costs
before allocation $ 360,000 $ 90,000 $ 400,000 $ 700,000
Cafeteria allocation (360,000) 60,000 120,000 180,000
Custodial allocation (150,000) 50,000 100,000
Total after allocation $ 0 $ 0 $ 570,000 $ 980,000

50,000
$150,000 = $100,000
25,000 + 50,000

Allocation base: Square feet occupied

 4B-26

Reciprocal Method
Service Operating
Department Department
Interdepartmental (Cafeteria) (Machining)
services are given
full recognition
rather than partial
recognition as with
the step method. Service Operating
Department Department
(Custodial) (Assembly)

Because of its mathematical complexity,

the reciprocal method is rarely used.
 4B-27

Quick Check Data

for Direct and Step-Down Methods
Service Departments Operating Departments
ADMIN BACS Accounting Others
Departmental costs
before allocation $ 180,000 $ 90,000 $ 190,000 $ 900,000
Number of employees 15 5 20 80
Number of PCs 12 20 18 102

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
 4B-28

Quick Check
How much cost will be allocated from
Administration to Accounting?
a. $ 36,000
b. $144,000
c. $180,000
d. $ 27,000
 4B-29

Quick Check
How much cost will be allocated from
Administration to Accounting?
a. $ 36,000
b. $144,000
c. $180,000 Service Departments Operating Departments
d. $ 27,000 ADMIN BACS Accounting Others
Departmental costs
before allocation $ 180,000 $ 90,000 $ 190,000 $ 900,000
ADMIN allocation (180,000) 36,000 144,000

20
$180,000 = $36,000
20 + 80
 4B-30

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
 4B-31

Service Departments Operating Departments

Quick Check ADMIN

BACS Accounting Others
Departmental costs
before allocation $ 180,000 $ 90,000 $ 190,000 $ 900,000
How much
ADMIN allocation
total cost
(180,000)
will be allocated
36,000
from144,000
BACSADMIN
allocation and BACS- combined(90,000) to the
13,500 76,500
Accounting
Total after allocation Department?
$ - $ - $ 239,500 $ 1,120,500
a. $ 52,500
b. $135,000
c. $270,000
d. $ 49,500
 4B-32

Quick Check Data

Service Departments Operating Departments
ADMIN BACS Accounting Others
Departmental costs
before allocation $ 180,000 $ 90,000 $ 190,000 $ 900,000
Number of employees 15 5 20 80
Number of PCs 12 20 18 102

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
 4B-33

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
 4B-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
 4B-35

End of Chapter 4