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 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-8 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-9 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-10 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-11 End of Appendix 4B