Chapter 16: Support Department Cost Allocations

What do Operating (Production) Department do?

They are involved in making products (e.g., machining, assembly)

What do Support (Service) Departments do?

Support operating departments (e.e., materials handling, facilities maintenance, engineering, plant admin.)

Do support departments also support each other?

Yes

How do support departments change our cost pools?

We need to allocate costs between the support departments, so now cost pools are spilling into each other

What are the methods for Inter-Support Department Cost Allocations?

• Direct Method

• Step-Down Method

• Reciprocal Method

What is the Direct Method of Inter-Support Department Cost Allocations?

• Ignored inter-department support

• Allocates ONLY to production departments

What are the steps for the Direct Method?

1. Find the percentage that each production department makes up among prod depts only

2. Multiply each percentage by the Total Costs

3. For each production department, add the allocated amounts

What is the Step-Down Method of Inter-Support Department Cost Allocations?

• Determine a support-department hierarchy

How do you allocate using the Step-Down Method?

• Allocate highest/first support department to production departments and remaining support departments

• Iterate through remaining support departments until ALL support costs are allocated to production departments

What are the steps for the Step-Down Method?

1. Determine which support department has the highest percentage allocated going to another support department (this determines which goes first)

2. Multiply each percentage the production/support departments by the Total Costs

3. Only allocate to the production departments now

4. For each production department, add the allocated amounts

What is the Reciprocal Method of Inter-Support Department Cost Allocations?

• Fully accounts for support between support departments

• Sets up relationship between support departments as equations and solves for cost to be allocated to production departments 

• Then, allocate each support department’s costs to production departments

What are the steps for the Reciprocal Method?

1. Create an equation for each production department (with amount * production dep’t or x)

2. Use substitution to solve for an unknown (x)

3. Plug into the other equation using x to find y

4. Use y and x to find the amounts allocated to each production department

5. For each production department, add the allocated amounts

How does the Direct Method differ from the other methods?

Production Department’s use the Support Department’s in different proportions

How does the Reciprocal Method differ from the other methods?

Reciprocal support (across support departments) is large

When are these differences across methods magnified?

With more support costs

Which method is more simple, but less accurate?

Direct Method

Which method is more accurate, but more complicated?

Reciprocal Method

Why don’t we use ABC Costing?

Support Departments SUPPORT each other

Why are there differences across methods?

Performance measurement