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Allocation of Support-Department Costs
Allocation of Support-Department Costs
Costs
Allocating Costs of a Supporting Department to
Operating Departments
Supporting (Service) Department – provides the services that assist other
internal departments in the company
Two Questions:
Should the Fixed Cost of Support Department, be allocated to operating
Departments?
If the Fixed Cost is allocated, Should the Fixed cost and Variable cost be
allocated in the same way?
Methods to Allocate Support Department Costs
Direct
Step-Down
Reciprocal
Direct Method
Information Systems
Manufacturing
Packaging
Accounting
Data Used in Cost Allocation Illustrations
Support Departments Operating Departments Total
Engineering and Materials Machining Assembly
Production Management
Control
Budgeted Overhead Cost 30,00,000 26,40,000 32,90,000 22,70,000 112,00,000
before any inter-
department Cost
allocation
Support Work Done:
By Engineering and - 6000 10,000 4000 20,000
Production Control (Hrs)
As Percent - 30% 50% 20% 100%
By Materials Management 400 - 800 2800 4000
(Hrs)
As Percent 10% - 20% 70% 100%
Direct Allocation Method
Information Systems
Manufacturing
Packaging
Accounting
Step-Down Allocation Method
5/10
Engineering and Production Control
Machining
30,00,000
Materials Management
{26,40,000 +(3/10)x Assembly
7/9
30,00,000}
Reciprocal Method
Information Systems
Manufacturing
Packaging
Accounting
Reciprocal Allocation Method
3/10 1/10
2/10 2/10
Materials Management
MM=26,40,000+0.3 EPC Assembly
36,49,485 7/10
Choosing Between Methods