Allocating Support Service costs

Question 1

Why does support service cost allocation matter?

Answer 1

Impacts firm profitability because one department might want to outsource certain services rather than using internal providers (opportunity costs)

Question 2

Internal or outsourced services?

Answer 2

Factors to consider:

• Are external service providers reliable?
• Is there any confidential strategies that cannot be shared to external parties?
• How do the costs compare?
• Who has the most adequate knowledge base?

Question 3

Production and support service departments

Answer 3

PD: carry out main operations to provide products or services to customers
SD: facilitate activities of production departments

Question 4

Negative impacts if support service costs are not charged

Answer 4

• prevent unnecessary requests due to the fact that it is free service
• waste of limited resources that could be used in other situations

Question 5

Other reason for allocating service costs

Answer 5

• quantify profitability and performance of each subsidiary, how much do each use internal facilities
• influencing behaviour: control managers to be more conscious about their activities

Question 6

Alternative solutions to allocate service costs

Answer 6

• Direct
• Step method
• Reciprocal

Question 7

Comparison of cost allocation methods

Answer 7

• Direct does not consider interactions between SDs

- Reciprocal method is more thorough in considering SD interactions, more accurate but complex and costly