The second method of allocating service department costs is the step method. This method allocates service costs to the operating departments and other service departments in a sequential process. The sequence of allocation generally starts with the service department that has incurred the greatest costs. After this department’s costs have been allocated, the service department with the next highest costs has its costs allocated, and so forth until the service department with the lowest costs has had its costs allocated. Costs are not allocated back to a department that has already had all of its costs allocated. Show
For this example, we will use the same data as before which was: Service Dept Operating Dept MaintenanceAdministration12Costs$8,000$4,000$32,000$36,000Machine-hours used1,0002,0001,5002,500Number of Employees100200250150In the step method, we typically begin with the highest service cost first. We will start with Maintenance and allocate the cost to all remaining operating AND service departments (administration, operating dept 1 and operating dept 2). When calculating the allocation rate, we never use the service department cost driver itself (so do not use the maintenance machine hours used). Maintenance Cost= $8,000=$8,000 = $1.3333 per machine hourMachine Hours (all but maintenance)(2,000 + 1,500 + 2,500)6,000We would allocate maintenance to Administration, Operating Departments 1 and 2 using the machine hours for each department x the maintenance rate per machine hour (round final answer to nearest dollar). AdminOper. Dept 1Oper. Dept 2Maintenance2,6672,0003,333(2,000 MH x 1.333)(1,500 MH x 1.3333)(2,500 MH x 1.3333)Next, we would allocate the administration department. The total administration cost has changed since we have the original department costs of $4,000 + maintenance cost allocated above of $2,667 making the new administration cost $6,667. Administration will be allocated based on number of employees. We will use the operating departments only since we have already allocate all of maintenance costs and there are no other service departments. Administration Cost= $6,667=$6,667= $16.6675 per employeeEmployees (operating depts only)(250 + 150)400We would allocate administration to the operating departments only by taking each department number of employees x the administration rate per employee (round final answer to nearest dollar). Oper. Dept 1Oper. Dept 2Administration4,1672,500(250 employees x 16.6675)(150 employees x 16.6675)The final cost allocation would appear as follows: Service Dept Operating Dept MaintenanceAdministration12Costs$8,000$4,000$32,000$36,000Maintenance cost allocated($8,000)2,6672,0003,333Administration cost allocated($6,667)4,1672,500Total Costs$0$0$38,167$41,833Remember, the step method recognizes a one-way relationship between service departments and once the service department cost has been allocated out to other departments, we do not go back and give additional costs to that department. Chapter 13 100%(2)100% found this document useful (2 votes) 6K views16 pagesDocument Informationclick to expand document informationCopyright© Attribution Non-Commercial (BY-NC) Available FormatsDOCX, PDF, TXT or read online from Scribd Share this documentShare or Embed DocumentSharing Options
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Home Books Audiobooks Documents What are the three methods of allocating service department costs?There are three methods for allocating service department costs: direct, sequential, and reciprocal.
What are the four cost allocation methods?When allocating costs, there are four allocation methods to choose from.. Direct labor.. Machine time used.. Square footage.. Units produced.. Which method would not be used as a basis for allocating expenses of department?Expert-Verified Answer. E-mail would not be used as the basis for allocating expenses to the department. Cost allocation is the most common way of distinguishing, collecting, and relegating costs to costs articles like divisions, items, programs, or a part of an organization.
Which of the following allocation methods allocates service departments costs to all departments that use the services provided by service departments?The reciprocal method allocates services department costs to operating departments and other service departments. Under the reciprocal cost, the relationship between service departments is recognized and cost is allocated to and from each service department for services provided.
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