CHAPTER 15
Allocation of Support Department Costs
Allocating Costs of a Support Department
to Operating Departments
• Support (service) department—provides the
services that assist other internal departments
in the company
• Operating (production) department—directly
adds value to a product or service
Methods to Allocate
Support Department Costs
• Single-rate method—allocates costs in each
cost pool (service department) to cost objects
(production departments) using the same rate
per unit of a single allocation base
– No distinction is made between fixed and variable
costs in this method.
Methods to Allocate
Support Department Costs
• Dual-rate method—segregates costs within
each cost pool into two segments: a variablecost pool and a fixed-cost pool.
• Each pool uses a different cost-allocation base.
Allocation Method Trade-Offs
• Single-rate method is simple to implement, but
treats fixed costs in a manner similar to
variable costs.
• Dual-rate method treats fixed and variable
costs more realistically, but is more complex to
implement.
An Example
Allocation Based on the Demand for (Usage of) Computer Services
The Central Computer Department costs are allocated to the two divisions on the basis of actual hours
used:
Allocation Based on the Demand for (Usage of) Computer Services
Dual-Rate Method
Allocation Based on Supply of Capacity
Allocation Based on Supply of Capacity
Methods of Allocating Support Costs
to Production Departments
1. Direct
2. Step-down
3. Reciprocal
Data Used in Cost Allocation Illustrations
Direct Method
• Allocates support costs only to operating
departments.
• Direct method does not allocate supportdepartment costs to other support departments.
Direct Allocation Method Illustrated
Direct Allocation Method Illustrated
Step-Down Method
• Also called the sequential allocation method
• Allocates support-department costs to other
support departments and to operating
departments in a sequential manner
• Partially recognizes the mutual services
provided among all support departments
Step-Down Allocation Method Illustrated
Step-Down Allocation Method Illustrated
Reciprocal Method
• Allocates support-department costs to operating
departments by fully recognizing the mutual
services provided among all support
departments.
• Reciprocal method fully incorporates
interdepartmental relationships into the supportdepartment cost allocation.
Reciprocal Allocation Method
(Repeated Iterations) Illustrated
Linear Equations
Linear Equations (cont)
Linear Equations (cont)
Reciprocal Allocation Method Illustrated
Reciprocal Allocation Method Illustrated
Confusion?
A Comparison of the Methods