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keyconcept-ch11 - Ch 11 Lecture notes including Demo cases...

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Ch. 11 Lecture notes including Demo cases with solutions. Why service costs are allocated. ♦ In the first stage of the two-stage cost allocation, part of the overhead costs are incurred for departments that do not produce the service or product directly. • Service departments provide services to other departments in the organization. User departments use the services of service departments. • An information systems department is a service department that provides support for information systems to other departments. A human resources department provides hiring and training services to other departments. • User departments could be other service departments or production or marketing departments that produce or market the organization’s products. • As shown in Exhibit 11.1, most user departments make use of all service departments. Depending on the situation, the service departments also provide service to each other. • An intermediate cost center is any cost center whose costs are charged to other departments in the organization. • A final cost center is a cost center, such as a production or marketing department, whose costs are not allocated to another cost center. • All organizations (service, merchandising, and manufacturing) have production or marketing departments and service departments. ♦ Three methods to allocate service department overhead costs are: (1) Direct method, (2) Step method, and (3) Reciprocal method. • Service department costs are allocated for two purposes: (1) To determine the cost to produce and market products or services. (2) To encourage operating department managers to monitor service department costs (cross-department monitoring). • Each service department is an intermediate cost center whose costs are recorded as incurred and then distributed to other cost centers. • An important decision in cost allocation is the allocation base that will be used. The criteria: cause and effect, reasonableness, and fairness, are still important here. Allocate service department costs using the direct method. Direct method is a cost allocation method that charges costs of service departments to user departments without making allocations between or among service departments.
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• The direct method allocates costs directly to the final users of a service, ignoring intermediate users. • Exhibit 11.4 is the cost flow diagram that illustrates the direct method. • Using the direct method, there are no allocations between service departments. It ignores the costs that the service departments themselves incur when they use services from other departments. Cross-department monitoring is lost in that regard. • The use of the direct method of cost allocation is shown in Exhibit 11.3.
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keyconcept-ch11 - Ch 11 Lecture notes including Demo cases...

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