Managing and Allocating Support-Service Costs by 7Hwfk9

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									   Managing and
Allocating Support-
   Service Costs

     Chapter 10
  Support/service departments
Organizational units providing support to
 other segments of the organization
  Accounting
  Human resources
  Information technology
  Maintenance
  Purchasing
  Etc.
   Allocation of service costs
Why?
 Internal charging
   Promotes more efficient use of internal services
 Compliance with contracts
 Required reporting
   Regulated industries
   Non-profits
   Etc.
    Allocation of service costs
Identify costs to be allocated
  Cost pools for distinct types of services or
   resources
  Resources used, not resources supplied
     Unused resources represent excess capacity
        Should not be charged to service users
    Allocation of service costs
Choose an appropriate allocation base for
 each type of service or resource
   Rent, insurance, maintenance   Square footage
   Heating/cooling                Volume of space
   Accounting, data processing    # of transactions
   Human resources, payroll       # of employees
   Information technology         # of computers
   Purchasing                     # of purchase orders
   Motor pool                     # of vehicles
    Allocation of service costs
Choose a cost allocation method
  Direct method
    Charges costs directly to producing departments
       No costs charged to other service departments

  Step method
    “Trickle-down” from highest priority, or greatest
     service providing department to next highest
     priority, eventually to producing departments
   Allocation of service costs
Direct method
  Advantages
    Simple

  Disadvantages
    Ignores services provided to other service
     departments
                             Example
 Step
priority          Department            Cost            Allocation base
   1       Buildings and grounds    $   100,000   Square footage
   2       Human resources               60,000   Number of employees
   3       Information technology        80,000   Number of computers
   4       Accounting                    50,000   Transactions processed
   5       Purchasing                    40,000   Number of purchase orders
                                    $   330,000

           Assembly                 $   700,000
           Testing                      100,000
           Packaging                    200,000
                                    $ 1,000,000
                             Example

                         Square       # of         # of     Transactions # of purchase
        Department       footage    employees   computers    processed       orders
Service departments
Buildings and grounds       1,000           5           2            50           30
Human resources             1,500           3           3           150           15
Information technology      1,000           3           5            50           50
Accounting                  2,000           5           5            50           10
Purchasing                    500           2           2           500           15

Production departments
Assembly                   20,000          45           3            20          200
Testing                     1,500           5           5            10           20
Packaging                   3,500          10           2            10           30
                                 Direct method
                                                                                                   Cost per
   Service department            Cost            Allocation base             Total base            base unit
Buildings and grounds       $    100,000   Square footage                        25,000        $           4
Human resources                   60,000   Number of employees                        60               1,000
Information technology            80,000   Number of computers                        10               8,000
Accounting                        50,000   Transactions processed                     40               1,250
Purchasing                        40,000   Number of purchase orders                 250                 160
                            $    330,000

                     Cost per          Assembly                Testing                  Packaging
    Base unit        base unit    Units      Cost        Units        Cost         Units       Cost

 Square footage      $      4    20,000    $    80,000    1,500   $     6,000       3,500      $       14,000

 # of employees          1,000       45         45,000        5         5,000          10              10,000

  # of computers         8,000        3         24,000        5        40,000              2           16,000
   Transactions
     processed           1,250       20         25,000       10        12,500          10              12,500
   # of purchase
       orders             160       200         32,000       20         3,200          30               4,800
Total service cost                         $   206,000            $    66,700                  $       57,300
Department cost
before allocation                              700,000                100,000                         200,000
Total cost                                 $   906,000            $   166,700                  $      257,300
                                                 Step method
                                                                                             Receiving department

                              Total base Cost per        Human        Information
   Department       Cost*      units** base unit       resources      technology Accounting         Purchasing    Assembly      Testing    Packaging
Department
cost before
allocation                                             $    60,000 $       80,000 $       50,000 $      40,000 $    700,000 $     100,000 $   200,000
Buildings and
grounds           $ 100,000     30,000    $     3.33        5,000          3,333          6,667          1,667       66,667        5,000       11,667
                                                       $   65,000
Human
resources           65,000          70        928.57       (65,000)        2,786          4,643          1,857       41,786        4,643        9,286
                                                       $       -          86,119
Information
technology          86,119          17    5,065.83                        (86,119)        25,329        10,132       15,197       25,329       10,132
                                                                      $       -           86,639
Accounting          86,639          540       160.44                                     (86,639)       80,221        3,209        1,604        1,604
                                                                                     $       -         133,876
Purchasing         133,876          250       535.51                                                  (133,876)     107,101       10,710       16,065
                                                                                                    $      -        933,960      147,287      248,754


* - Cost includes costs allocated from previous departments
** - Total base units are based on the units in the receiving departments only

								
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