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Allocation of Support Department Costs, Common Costs, and Revenues

The document discusses three methods for allocating support department costs: direct, step-down, and reciprocal. The direct method only allocates costs to operating departments, while step-down and reciprocal methods allocate costs between support departments as well. Reciprocal is the most precise but also the most complex, while direct is the simplest but least precise.

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32 views17 pages

Allocation of Support Department Costs, Common Costs, and Revenues

The document discusses three methods for allocating support department costs: direct, step-down, and reciprocal. The direct method only allocates costs to operating departments, while step-down and reciprocal methods allocate costs between support departments as well. Reciprocal is the most precise but also the most complex, while direct is the simplest but least precise.

Uploaded by

m Srour
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Allocation of

Support Department Costs,


Common Costs,
and Revenues

© 2009 Pearson Prentice Hall. All rights reserved.


Allocating Costs of a Supporting
Department to Operating Departments
Supporting (Service) Department – provides the
services that assist other internal departments in the
company
Operating (Production) Department – directly adds
value to a product or service

© 2009 Pearson Prentice Hall. All rights reserved.


Methods of Allocating Support Costs to
Production Departments

1. Direct
2. Step-Down
3. Reciprocal

© 2009 Pearson Prentice Hall. All rights reserved.


Direct Method
Allocates support costs only to Operating
Departments
No Interaction between Support Departments prior
to allocation

© 2009 Pearson Prentice Hall. All rights reserved.


Direct Method
Support Departments Production Departments

Information Systems

Manufacturing

Packaging

Accounting

© 2009 Pearson Prentice Hall. All rights reserved.


Data Used in Cost Allocation
Illustrations

© 2009 Pearson Prentice Hall. All rights reserved.


Direct Allocation Method Illustrated

© 2009 Pearson Prentice Hall. All rights reserved.


Direct Allocation Method
Illustrated, cont.

© 2009 Pearson Prentice Hall. All rights reserved.


Step-Down Method
Allocates support costs to other support departments
and to operating departments that partially
recognizes the mutual services provided among all
support departments
One-Way Interaction between Support Departments
prior to allocation

© 2009 Pearson Prentice Hall. All rights reserved.


Step-Down Method
Support Departments Production Departments

Information Systems

Manufacturing

Packaging

Accounting

© 2009 Pearson Prentice Hall. All rights reserved.


Step-Down Allocation Method
Illustrated

© 2009 Pearson Prentice Hall. All rights reserved.


Step-Down Allocation Method
Illustrated, cont.

© 2009 Pearson Prentice Hall. All rights reserved.


Reciprocal Method
Allocates support department costs to operating
departments by fully recognizing the mutual services
provided among all support departments
Full Two-Way Interaction between Support
Departments prior to allocation

© 2009 Pearson Prentice Hall. All rights reserved.


Reciprocal Method
Support Departments Production Departments

Information Systems

Manufacturing

Packaging

Accounting

© 2009 Pearson Prentice Hall. All rights reserved.


Reciprocal Allocation Method
(Repeated Iterations) Illustrated

© 2009 Pearson Prentice Hall. All rights reserved.


Reciprocal Allocation Method
(Linear Equations) Illustrated

© 2009 Pearson Prentice Hall. All rights reserved.


Choosing Between Methods
Reciprocal is the most precise
Direct and Step-Down are simple to compute and
understand
Direct Method is widely used

© 2009 Pearson Prentice Hall. All rights reserved.

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