Service Department Allocations Instructor: Michael G. Booth. Chapter 4B

Transcription

1 Service Allocations Instructor: Michael G. Booth Chapter 4B

2 Service Allocations

3 Operating s An operating department carries out the central purpose of the organization The Surgery at Mount Sinai Hospital. The Geography at the University of Washington. A Production at Mitsubishi.

4 Service s Service departments do not directly engage in operating activities. The Accounting at Macy s. The Human Resources at Walgreens.

5 Interdepartmental Services Service Costs of the service department become overhead costs to the operating department Operating

6 Allocation Approaches Direct Method Step-Down Method Reciprocal Method

7 service department costs to operating departments using the direct method.

8 Direct Method Interactions between service departments are ignored and all costs are allocated directly to operating departments. Service (Cafeteria) Service (Custodial) Operating (Machining) Operating (Assembly)

9 Direct Method An Example Service Cafeteria Custodial Allocation Base Number of employees Square feet occupied Allocation Cost Cafeteria = $360,000/50 employee =$7,200 per employee Allocation Cost Custodial = $90,000/75,000 sq ft = $1.20 / sq ft

10 Direct Method An Example How much of the Cafeteria and Custodial costs should be allocated to each operating department using the direct method of cost allocation?

11 Direct Method An Example $7, employees= $144,000 Allocation base: Number of employees

12 Direct Method An Example $7, employees= $216,000 Allocation base: Number of employees

13 Direct Method An Example $1.20/ sq ft 25,000 sq ft = $30,000 Allocation base: Square feet occupied

14 Direct Method An Example $1.20/ sq ft 50,000 sq ft = $60,000 Allocation base: Square feet occupied

15 Service costs to Operating s using the step-down method.

16 Step-Down Method Once a service department s costs are allocated, other service department costs are not allocated back to it. Service (Cafeteria) Service (Custodial) Operating (Machining) Operating (Assembly)

17 Step-Down Method There are three key points to understand regarding the stepdown method: In both the direct and step-down methods, any amount of the allocation base attributable to the service department whose cost is being allocated is always ignored. Any amount of the allocation base that is attributable to a service department whose cost has already been allocated is ignored. Each service department assigns its own costs to operating departments plus the costs that have been allocated to it from other service departments.

18 Step-Down Method An Example The same data used in the direct method example. Service Cafeteria Custodial Allocation Base Number of employees Square feet occupied

19 Step-Down Method An Example Allocate Cafeteria costs first since it provides more service than Custodial $360,000/ 60 employees = $6,000/ employee

20 Step-Down Method An Example $6, = $60,000 Allocation base: Number of employees

21 Step-Down Method An Example $6, = $120,000 Allocation base: Number of employees

22 Step-Down Method An Example $6, = $180,000 Allocation base: Number of employees

23 Step-Down Method An Example New total = $90,000 +$60,000 allocated Custodial Allocation = 150,000/ 75,000 sq ft = $2.00

24 Step-Down Method An Example $$2.00/sq ft 25,000 = $50,000 Allocation base: Square feet occupied

25 Step-Down Method An Example $2.00/sq ft X 50,000 = $100,000 Allocation base: Square feet occupied

26 Interdepartmental services are given full recognition rather than partial recognition as with the step method. Reciprocal Method Service (Cafeteria) Service (Custodial) Operating (Machining) Operating (Assembly) Because of its mathematical complexity, the reciprocal method is rarely used.

27 Reciprocal Services Service 1 When service departments provide services to each other we call them reciprocal services. Service 2

28 Assignments: See web: http//cabrillo.instructure.com This will be updated weekly Note: Use McGrawHill Connect manager to submit assignments