54. Support Department Costing

Question 1

Regardless of whether a process is based on cost tracking or cost allocation, what four management objectives do organizations generally work to accomplish in the assignment of support department costs to production departments?

Answer 1

1. The process needs to be transparent to all departments involved.
2. The cost assignment process should emphasize equity in results of the cost assignment.
3. The method(s) used to assign support department costs to production departments should be relevant to the types of decisions being made based on those costs.
4. Cost assignment systems are most effective when they establish accountability within the organization.

Question 2

Describe how support cost assignments are made under the direct method.

Answer 2

Although support departments provide support activities to the production departments as well as the other support departments, the direct method avoids the reality that support departments serve each other and instead makes the cost assignments directly to the production departments using the traditional two-step process by:

1. Building a cost assignment rate
2. Using the rate to assign costs to the cost object

Question 3

Describe how support cost assignments are made under the step-down method.

Answer 3

The computational approach in the step-down method is similar to the direct method, but the step-down method pays some attention to the fact that support departments also support each other. Usually, management determines the order used to assign costs by identifying the support department that provides the most support to the other departments, followed by the department that provides the second most support, and so forth. The order choice is subjective, but it can affect the costs finally assigned to production departments.

Question 4

Describe how support cost assignments are made under the reciprocal method

Answer 4

The reciprocal method better represents the reality that support departments provide resources to each other as well as to production departments. This method creates a two-step solution that represents (1) a simultaneous assignment of costs between the support departments followed by (2) a direct assignment of costs to the production departments.

Question 5

Describe how to solve for a simultaneous assignment of costs between the support departments under the reciprocal cost assignment method.

Answer 5

1. Set up an equation for each department that represents its total cost after receiving an assignment of costs from the other departments.
2. Use the substitution method for two unknowns by using the following steps.
3. Select one of the equations to solve first.
4. Solve the first equation by substituting the second equation into the first equation.
5. Solve the second equation using the solution from the first equation

Question 6

Describe how the dual rate approach is used with any support department cost method to separately assign fixed and variable costs.

Answer 6

The dual rate approach splits costs into fixed and variable, then allocates fixed costs using a fixed cost rate and tracks variable costs using a variable cost rate. The fixed cost allocation rates are established on the normal capacity of the activity. The variable cost tracking rates are established on the budgeted use of the activity, with an expectation that spending will change depending on expected changes in budgeted activity that uses the support costs.