ACC 2003

Cost Accounting
Chapter 11- Service Department cost Allocation
Notes and Exercises

CLO 5: Identify different methods of Joint Cost Allocation

Week 14

 This section focuses on allocating the costs of a service department to other departments that
use the service.

 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.

Methods of Allocating Service Department Costs

Direct Method

 The direct method allocates costs directly to the final user of a service (e.g., Hilltop
Mine), ignoring intermediate users (e.g., Administration).
 The direct method makes no allocations among service departments. Thus,
Information Systems’ costs attributable to the Administration Department are not
allocated to Administration.
 Instead, the service department costs are allocated “directly” to the user departments—
hence, the name direct method.

Step Method (Indirect method)

 The step method recognizes that one service department can provide services to
others and allocates some service department costs to other service departments.
 Allocations usually are made first from the service department that has provided
the largest proportion of its total services to other service departments.
 Once an allocation is made from a service department, no further allocations are
made back to that department.
 Hence, a service department that provides services to, and receives services from,
another service department has only one of these two relationships recognized.
11-26. Cost Allocation: Direct Method

Caro Manufacturing has two production departments, Machining and Assembly, and two service
departments, Maintenance and Cafeteria. Direct costs for each department and the proportion of
service costs used by the various departments for the month of August follow:

Required:
Compute the allocation of service department costs to producing departments using the direct
method.
11-28. Cost Allocation: Direct Method

University Printers has two service departments (Maintenance and Personnel) and two operating
departments (user department) (Printing and Developing). Management has decided to allocate
maintenance costs on the basis of machine-hours in each department and personnel costs on the
basis of labor-hours worked by the employees in each.

The following data appear in the company records for the current period:

Required
Use the direct method to allocate these service department costs to the operating departments.
Rate Maintenance Personnel Printing Developing
Direct costs for each
$5,000 $12,000 $15,000 $10,000
department
Direct cost allocated
from Maintenance
to:
Machin hours / Total
Machin hours
% x Department DC
Printing 1,000 / 4,000 = 0.25
($1,250) $1,250
0.25 x 5,000 = 1,250
Developing 3,000 / 4,000 = 0.75
($3,750) $3,750
0.75 x 5,000 = 3,750
Direct cost after
allocated from 0 $12,000 $16,250 $13,750
Maintenance cost
Direct cost allocated
from personnel to:
Labor hours / Total
labor hours
% x Department DC
Printing 500 / 2,500 = 0.2
($2,400) $2,400
0.2 x 12,000 = 2,400
Developing 2,000 / 2,500 = 0.8
($9,600) $9,600
0.8 x 12,000 = 9,600
Direct cost after
allocated from 0 $18,650 $23,350
personnel cost
 11-29. Cost Allocation: Step Method
Refer to the data for Caro Manufacturing in Exercise 11-26.

Required:
Use the step method to allocate the service costs, using the following:
1. The order of allocation starts with Maintenance.
2. The allocations are made in the reverse order (starting with Cafeteria).
 11-30. Cost Allocation: Step Method

Refer to the data for University Printers in Exercise 11-28.

Required
Allocate the service department costs using the step method, starting with the Maintenance
Department. What effect does using this method have on the allocation of costs?
Rate Maintenance Personnel Printing Developing
Direct costs for each
$5,000 $12,000 $15,000 $10,000
department
Direct cost allocated
from Maintenance to:
Machin hours / Total
Machin hours
% x Department DC
Personnel 1,000 / 5,000 = 0.2
($1,000) $1,000
0.2 x 5,000 = 1,000
Printing 1,000 / 5,000 = 0.2
($1,000) $1,000
0.2 x 5,000 = 1,000
Developing 3,000 / 5,000 = 0.6
($3,000) $3,000
0.6 x 5,000 = 3,000
Direct cost after allocated
0 $13,000 $16,000 $13,000
from Maintenance cost
Direct cost allocated
from personnel to:
Labor hours / Total labor
hours
% x Department DC
Printing 500 / 2,500 = 0.2
($2,600) $2,600
0.2 x 13,000 = 2,600
Developing 2,000 / 2,500 = 0.8
0.8 x 13,000 = ($10,400) $10,400
10,400
Direct cost after allocated
0 $18,600 $23,400
from personnel cost