Cost Management

CHAPTER 17

Allocation of Support Activity Costs and Joint Costs

ANSWERS TO REVIEW QUESTIONS

17-1 A service department is a unit in an organization that is not involved directly in producing the organization’s goods or services. However, a service department does provide a service that enables the organization’s production process to take place. Production departments, on the other hand, are units that are directly involved in producing the organization’s goods and services. An example of a service department in a bank would be the computer department or the human resources department. An example of a “production” department in a bank would be the consumer loan department.

17-2 The term reciprocal services refers to the situation in which two or more service departments provide services to each other.

17-3 (a) Under the direct method of service department cost allocation, all service department costs are allocated directly to the production departments, and none of these costs are allocated to other service departments.

b) Under the step-down method, a sequence is first established for allocation of service department costs. Then the costs incurred in the first service department in the sequence are allocated among all other departments that use that service department’s services, including other service departments. The method proceeds in a similar fashion through the sequence of service departments.

c) Under the reciprocal-services method, a system of simultaneous equations is established to reflect the reciprocal provision of services among service departments. Then all of the service departments’ costs are allocated among all of the departments that use the various service departments’ output of services. The reciprocal-services method of service department cost allocation is the only method that fully accounts for the reciprocal provision of services among departments.

17-4 The first department in the sequence...