PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Service Department Allocations Appendix 4B

4B-2 Operating Departments An operating department carries out the central purpose of the organization. The Surgery Department at Mount Sinai Hospital. The Production Departments at Mitsubishi. The Geography Department at the University of Washington.

4B-3 Service Departments Service departments do not directly engage in operating activities. The Accounting Department at Macy’s. The Human Resources Department at Walgreens. The Cafeteria at Genesco. The Internal Audit Department at Exxon.

4B-4 Interdepartmental Services Service Department Operating Department Costs of the service department become overhead costs to the operating department.

4B-5 Allocation Approaches

4B-6 Reciprocal Services Service Department 1 Service Department 2 When service departments provide services to each other we call them reciprocal services.

4B-7 Learning Objective 10 Allocate service department costs to operating departments using the direct method.

4B-8 Direct Method Service Department (Cafeteria) Service Department (Custodial) Operating Department (Machining) Operating Department (Assembly) Interactions between service departments are ignored and all costs are allocated directly to operating departments. Interactions between service departments are ignored and all costs are allocated directly to operating departments.

4B-9 Direct Method – An Example

4B-10 Direct Method – An Example How much of the Cafeteria and Custodial costs should be allocated to each operating department using the direct method of cost allocation?

4B-11 Direct Method – An Example Allocation base: Number of employees

4B-12 Direct Method – An Example Allocation base: Number of employees $360,000 × = $216,000

4B-13 Direct Method – An Example Allocation base: Square feet occupied $90,000 × 25,000 25, ,000 = $30,000

4B-14 Direct Method – An Example Allocation base: Square feet occupied 50,000 25, ,000 $90,000 × = $60,000

4B-15 Learning Objective 11 Allocate service department costs to operating departments using the step-down method.

4B-16 Operating Department (Machining) Operating Department (Assembly) Step-Down Method Service Department (Cafeteria) Service Department (Custodial) Once a service department’s costs are allocated, other service department costs are not allocated back to it.

4B-17 Step-Down Method There are three key points to understand regarding the step-down method:   In both the direct and step-down methods, any amount of the allocation base attributable to the service department whose cost is being allocated is always ignored.   Any amount of the allocation base that is attributable to a service department whose cost has already been allocated is ignored.   Each service department assigns its own costs to operating departments plus the costs that have been allocated to it from other service departments.

4B-18 Recall the data used in the direct method example. Step-Down Method – An Example

4B-19 Allocate Cafeteria costs first since it provides more service than Custodial. Step-Down Method – An Example

4B-20 $360,000 × = $60,000 Allocation base: Number of employees Step-Down Method – An Example

4B-21 $360,000 × = $120,000 Allocation base: Number of employees Step-Down Method – An Example

4B-22 $360,000 × = $180,000 Allocation base: Number of employees Step-Down Method – An Example

4B-23 New total = $90,000 original Custodial cost plus $60,000 allocated from the Cafeteria. Step-Down Method – An Example

4B-24 $150,000 × 25,000 25, ,000 = $50,000 Allocation base: Square feet occupied Step-Down Method – An Example

4B-25 $150,000 × 50,000 25, ,000 = $100,000 Allocation base: Square feet occupied Step-Down Method – An Example

4B-26 Reciprocal Method Interdepartmental services are given full recognition rather than partial recognition as with the step method. Service Department (Cafeteria) Service Department (Custodial) Operating Department (Machining) Operating Department (Assembly) Because of its mathematical complexity, the reciprocal method is rarely used.

4B-27 Quick Check Data for Direct and Step-Down Methods Allocation bases: Business school administration costs (ADMIN): Number of employees Business Administration computer services (BACS): Number of personal computers The direct method of allocation is used.

4B-28 Quick Check How much cost will be allocated from Administration to Accounting? a. $ 36,000 b. $144,000 c. $180,000 d. $ 27,000

4B-29 How much cost will be allocated from Administration to Accounting? a. $ 36,000 b. $144,000 c. $180,000 d. $ 27,000 Quick Check $180,000 × = $36,000

4B-30 Quick Check How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department? a. $ 52,500 b. $135,000 c. $270,000 d. $ 49,500

4B-31 How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department? a. $ 52,500 b. $135,000 c. $270,000 d. $ 49,500 Quick Check

4B-32 Quick Check Data Allocation bases: Business school administration costs (ADMIN): Number of employees Business administration computer services (BACS): Number of personal computers Allocation bases: Business school administration costs (ADMIN): Number of employees Business administration computer services (BACS): Number of personal computers The step-down method of allocation is used.

4B-33 Quick Check How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department? a. $35,250 b. $49,072 c. $18,000 d. $26,333

4B-34 How much total cost will be allocated from ADMIN and BACS combined to the Accounting Department? a. $35,250 b. $49,072 c. $18,000 d. $26,333 Quick Check

4B-35 End of Appendix 4B