3 - Lecture 3 Service Department Costing: An Activity...

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Lecture 3 Service Department Costing: An Activity Approach
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Reasons for Allocating Service Department Costs To encourage operating departments to wisely use service department resources. To provide operating departments with more complete cost data for making decisions. To help measure the profitability of operating departments. To create incentive for service departments to operate efficiently. To value inventory for external financial reporting purposes. To include all overhead in the cost base when cost-plus pricing is used.
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$ Selecting Allocation Bases Operating Departments Service Departments The allocation bases used should “drive” the cost being allocated. For example, when allocating costs of the employee cafeteria, the number of meals served would be a good choice for the allocation base.
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Selecting Allocation Bases Operating Departments Service Departments $ A service department’s costs may be allocated using more than one base. For example, a portion of the human resource department costs might be allocated based on the number of employees in each operating department and another portion might be allocated based on hours spent in training employees in each operating department.
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Examples of Allocation Bases Service Department Allocation Bases Laundry Pounds of laundry Airport Ground Services Number of flights Cafeteria Number of meals Medical Facilities Cases handled; number of employees; hours worked Materials Handling Hours of service; volume handled Information Technology Number of personal computers; applications installed Custodial Services Square footage occupied Cost Accounting Labor hours; customers served Power KWH used; capacity of machines Human Resources Number of employees; training hours Receiving, Shipping, and Stores Units handled; number of requisitions; space occupied Factory Administration Total labor hours Maintenance Machine hours
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Interdepartmental Services Problem Allocating costs when service departments provide services to each other Solutions Direct Method Step Method Reciprocal Method
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Direct Method Service Department (Cafeteria) Service Department (Custodial) Operating Department (Machining) Operating Department (Assembly) Interactions between service departments are ignored and all costs are allocated directly to operating departments.
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Direct Method Example Service Departments Operating Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation 360,000 $ 90,000 $ 400,000 $ 700,000 $ Number of employees 15 10 20 30 Square feet occupied 5,000 2,000 25,000 50,000 Service Department Allocation Base Cafeteria Number of employees Custodial Square feet occupied
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Direct Method Example Service Departments Operating Departments Cafeteria Custodial Machining Assembly Departmental costs before allocation 360,000 $ 90,000 $ 400,000 $ 700,000 $ Cafeteria allocation ? ? ?
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3 - Lecture 3 Service Department Costing: An Activity...

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