Service Department Costing:
After studying this chapter you should
be able to:
Difference between service department and operating department:
Most of the large organizations have
both operating departments and service departments. The central purpose of
the organization are carried out in the operating department. In contrast,
service departments do not directly engage in operating activities. Instead,
they provide services or assistance to the operating departments. Examples
of operating departments include the surgery departments at hospitals,
geography departments at universities, the marketing departments insurance
companies, and production departments at manufacturing companies like
Mitsubishi, Hewlett-Packard. Examples of service departments include
Cafeteria, Internal Auditing, Human Resources, Cost Accounting, and
Purchasing. The costs incurred by
service departments are usually allocated to the operating departments, and
from the operating departments to the products and services. Many service
departments also provide services to other service departments within
organization. The cafeteria department, for example, provides food for all
employees, including those assigned to other service departments. In return
cafeteria department may receive services from other service departments
such as from custodial services or personnel. Services provided between
service departments are known as
interdepartmental services or
reciprocal services.
Several
different methods are used to allocate costs of service departments to
operating departments. Regardless of the allocation method that is
ultimately selected, an
allocation base
must be selected for each service department.
Selecting Allocation Bases:
Costs are ordinarily assigned to
products and services by using a two stage process. In first stage, service
department and other costs are allocated to operating departments. In second
stage, the costs that have been assigned to operating departments are
allocated to products and services. Here we will focus on the first stage,
in which service department costs are allocated to operating departments.
Click here to continue reading. Cost Allocations Using Direct and Step
Methods:
Three approaches are used to allocate the
costs of service department to other departments. These are known as the
direct method, the step method, and the reciprocal method.
All three methods are discussed in the following
paragraphs.
Direct Method of Cost Allocation in Service department costing:
Direct method is a cost allocation method
under which any of the allocation base attributable to the service
departments themselves is ignored; only the amount of the allocation base
attributable to the operating departments is used in the allocation.
Click here to continue reading.
Step Method of Cost
Allocation in Service Department Costing:
Unlike the direct method, the step method
provides for allocation of a service department's costs to other service
departments, as well as to operating departments. The step method is
sequential. Click here to continue reading.
Reciprocal
Method of Cost Allocation-Service Department Costing:
The reciprocal method gives full recognition to
interdepartmental services. Under the step method, only partial recognition
of interdepartmental services is possible. The step method always allocates
costs forward never backward. The reciprocal method, by contrast, allocates
service department costs in both directions. The reciprocal allocation
requires the use of simultaneous equations.
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