Service Allocation Notes

Service Department Cost Allocation Essay:

Chapter 11:

* Explain why service costs are allocated

* Allocate service department costs using the direct method

* Allocate service department costs using the step method

* Allocate service department costs using the reciprocal method

* Use the reciprocal method for decisions

* Explain why joint costs are allocated

* Allocate join costs using the net realizable value method

* Allocate joint costs using the physical quantities method

* Explain how cost data are used in the sell or process further decision

* Account for by products

* Use spreadsheets to solve reciprocal cost allocation problems

Two-stage cost allocation – we took the first-stage allocation process as given and concentrated on allocating the cost pools in the second stage

Service department cost allocation – which is the process used to allocate the costs of these “service” departments.

Product costing when multiple products are jointly produced from common inputs in fixed proportions such as the coal at CCC

Service Department Cost Allocation:

Service departments provide services to other departments. For example, an information systems department is a service department that provides information systems support to other departments, and a human resources department provides hiring and training services to other departments.

User departments use the functions of service departments. For example, the production department uses the services provided by the information systems and human resources departments. User departments could be other service departments or production or marketing departments that produce or market the organization’s products.

Definitions so far:

Service Department – Department that provides services to other subunits in the organization

User Department – Department that uses the functions of service departments.

Main focus of this chapter is on allocating the costs of service...