Support Dept. Costing Flashcards
What are support departments?
Departments that do not generate revenue directly but provide services to operating units, such as HR, IT, legal, and maintenance.
Why are support department costs allocated to operating units?
To reflect the full cost of running operating units for better pricing and profitability analysis.
To evaluate the profitability of individual operating units and optimize decision-making.
What are the three methods of allocating support department costs?
Direct Method: Allocates support costs directly to operating units without considering interactions between support departments.
Step Method: Allocates support costs sequentially, recognizing some interaction between support departments.
Reciprocal Method: Fully accounts for mutual services exchanged between support departments.
How does the direct method allocate costs?
Costs are assigned from support departments to operating units based on proportional usage, ignoring interactions between support departments.
What distinguishes the step method from the direct method?
The step method accounts for partial interactions between support departments by allocating costs from one support department to others before allocating to operating units.
What is the reciprocal method?
A detailed approach that uses simultaneous equations to account for all mutual services exchanged between support departments.
What are common costs?
Costs shared among multiple parties, such as shared facilities or bundled product costs.
What are the two methods for allocating common costs?
Stand-Alone Method: Allocates costs proportionally based on the standalone cost each entity would incur.
Incremental Method: Allocates costs by ranking users, assigning the primary cost to the top user and additional costs incrementally to others.
How are revenues allocated for bundled products/services?
Using either the stand-alone or incremental method to distribute transaction prices among bundled components based on their individual prices or priorities.
What are the benefits of accurate support cost allocation?
Improved pricing and profitability decisions.
Enhanced understanding of resource usage.
Fair performance evaluation of operating units.
What factors are considered when ranking support departments in the step method?
The extent of services provided to other support departments.
The total costs of running the support department.
Why is the reciprocal method often preferred despite its complexity?
It provides the most accurate reflection of how support services are consumed across the organization.
What is the purpose of allocating bundled revenues?
To accurately measure sales and profitability by product or service line, enabling better decision-making.
How do shared spaces in a business relate to support costing?
Common areas like lobbies or gyms in a hotel are examples of shared costs that need allocation among benefiting units.
What is an example of a cost driver for support cost allocation?
Square footage for facilities costs or the number of employees for HR costs.
