Cost Management 2nd edition, Ch 08 - Measuring and Assigning Support Department Costs

What are Operating Departments, and what are Support Departments?

Operating Departments - are the departments or divisions within an organization that manufacture goods or produce services for external customers or clients. Support Departments - provide services internal to the organization that support the operating departments.

What is the difference between Single- and Dual-Rate allocations?

Singe-Rate Allocation: uses only one base to allocate both fixed and variable costs. Dual-Rate Allocation: accumulates fixed and variable costs in separate cost pools and uses different allocation bases for these cost pools.

How is the Step-Down Method used to allocate support costs to operating departments?

Step-Down Method - Support department costs are allocated one department at a time to remaining support and operating departments in a cascading manner until all support department costs have been allocated.

What are the pros/cons of the Reciprocal Method?

* Computationally the most complex, but computers simplify the process. * May be difficult to explain to managers and others. * Most accurate allocation method because it takes into account all of the interactions among support departments.

What are the pros/cons of the Direct Method?

* Easiest method computationally, bu computers make this factor less important. * Easy to explain to managers and others. * Ignores interactions among support departments.

What are the pros/cons of Single- and Dual-Rate allocations?

* Reduces mismeasurement of allocations. * Reduces misunderstandings about the behavior of support costs. * Costs more to develop and maintain. * May introduce additional mismeasurement from problems classifying costs as fixed and variable.

What are the pros/cons of the Step-Down Method?

* Requires ranking of support departments in terms of services provided to other support departments. * Moderately easy computations, depending on the number of support departments. * Moderately easy to explain to managers and others. * Takes into account some of the interactions among support departments.

What process is used to allocate support department costs?

1. Clarify the purpose of the allocation. 2. Identify support and operating department cost pools. 3. Assign costs to cost pools. 4. For each support department cost pool, choose an allocation base. 5. Choose and apply a method for allocating support department costs to operating departments. 6. If relevant, allocate support costs from the operating departments to units of goods or services.

What are the 3 methods used to allocate support costs to operating departments?

A. Direct Method B. Step-Down Method C. Reciprocal Method

What are the objectives for allocating support department costs?

A. External Reporting (IE - cost reports for government contracts, income tax returns, reports prepared for reimbursement purposes) B. Control Systems (IE - encourage coordination across departments, provide incentives for efficient production of support services, provide incentives for appropriate use of support services, monitor use and production of support services) C. Strategic or Operating Decisions (IE - insource/outsource, pricing)

How is the Direct Method used to allocate support costs to operating departments?

Direct Method - Each support department's cost is allocated to only the operating departments.

How is the Reciprocal Method used to allocate support costs to operating departments?

Reciprocal Method: First, support department costs are simultaneously allocated among support departments. Next, support department costs, including interactions, are allocated to operating departments.