Week 10- Allocating support service costs Flashcards
what is a production department?
A department in a business that is involved with producing the product or providing the service eg. manufacturing or customer service
what is a support service department?
Provide support that facilitates the activities of production departments eg. Human resources and accounting support the production departments
what are the two methods for managing internal support service costs?
1) Do not charge internal customers for support services and recover the costs from general revenues
2) Charge the cost of support services to using departments and possibly recover the costs from these internal customers
what is cost allocation?
The process of assigning indirect costs (common costs of shared facilities or services) to cost objects (these are departments benefitting from services)
what are the three methods of allocating service support costs?
Direct method
Step-down method
reciprocal method
In the direct method are costs between service departments ignored?
yes, costs are purely allocated from the service department to the appropriate production department
What is the calculation for the direct method?
Total service support cost * percentage used by production department/ total percentage used by all production departments
In the step down method are costs between service departments ignored?
No, the department with the most use is allocated to the other service department first and then allocated to the production departments
Once a service department costs are allocated using the step down method are the other service department costs allocated back to it?
No
What is the reciprocal method of cost allocation?
- Allows the simultaneous allocation of cost between services meaning service departments can allocate costs two ways rather than in one direction like step down
which methods are the most accurate?
The reciprocal and step down methods but they are also the most complex and costly to implement
