Prepared by Diane Tanner University of North Florida

1. Chapter 15 Support Cost Allocation Prepared by Diane Tanner University of North Florida

2. Why Allocate Support Department Costs? • Without services provided, a manufacturing facility could not function. • Examples of services costs to be allocated • Payroll • Maintenance • HR • Accounting services • Information technology • Housekeeping

3. Actual Vs Budget • Service department costs allocation bases • Actual rates • Ensure that all service department costs are allocated. • Budgeted rates • Provide service department managers incentives to control costs • Provide user departments more accurate information about service department billing rates for planning purposes • In either case, allocate using an allocation base that reflects a cause-and-effect relationship

4. Operating Vs. Service Departments • Operating (user) departments • Add value to products or services • Also called production departments • Examples • Assembly, machining, particular sales units, geographical units, testing • Service (support) departments • Provides support and assists operating departments and other service departments • Examples • Maintenance, IT, accounting, payroll, HR, housekeeping

5. The Big Picture 1. Allocate to Cost Pools 2. Allocate to Cost Objects

6. Methods of Allocating Costs of Multiple Support Departments • Direct method • Allocates support department costs to operating departments only • Step-down method • Allocates support department costs to ‘some’ service departments and to operating departments • Partially recognizes the mutual services provided among all service departments • Reciprocal method • Allocates support department costs to all service and operating departments • Fully recognizes the mutual services provided among all services departments

7. The End