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The Need for Cost Allocations First Stage Allocations Service department costs are allocated to operating departments. Service Department (Cafeteria) Service.

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Presentation on theme: "The Need for Cost Allocations First Stage Allocations Service department costs are allocated to operating departments. Service Department (Cafeteria) Service."— Presentation transcript:

1 The Need for Cost Allocations First Stage Allocations Service department costs are allocated to operating departments. Service Department (Cafeteria) Service Department (Accounting) Service Department (Personnel) Operating Department (Machining) Operating Department (Assembly) The Products Next Page Click Here

2 The Need for Cost Allocations Service Department (Cafeteria) Service Department (Accounting) Service Department (Personnel) Operating Department (Machining) Operating Department (Assembly) The Products Next Page Click Here Second Stage Allocations Operating department overhead costs and allocated service department costs are applied to products.

3 Interdepartmental Services Problem Allocating costs when service departments provide services to each other Problem Allocating costs when service departments provide services to each other Solutions Direct Method Step Method Reciprocal Method Covered here Next Page Click Here

4 Direct Method Service Department (Cafeteria) Service Department (Custodial) Operating Department (Machining) Operating Department (Assembly) DIRECT METHOD Cost of services between service departments are ignored, and all costs are allocated directly to operating departments. Next Page Click Here

5 Direct Method Example Next Page Click Here

6 Direct Method Example $360,000 × 20 20 + 30 = $144,000 Allocation base: Number of employees Next Page Click Here

7 Direct Method Example $360,000 × 30 20 + 30 = $216,000 Allocation base: Number of employees Next Page Click Here

8 Direct Method Example $90,000 × 25,000 25,000 + 50,000 = $30,000 Allocation base: Square feet occupied Next Page Click Here

9 Direct Method Example Allocation base: Square feet occupied $90,000 × 50,000 25,000 + 50,000 = $60,000 Next Page Click Here

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