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Lecture Fundamentals of cost accounting - Chapter 11: Service department and joint cost allocation

We have seen how cost allocation is used to develop the costs of products, services, and customers. However, part of the indirect cost incurred is from departments that do not directly produce the product or service but rather provide service to the departments that do produce the product or provide the service. In this chapter we will allocate the costs of these “service” departments. We will also consider product costing when multiple products are produced from the same inputs in fixed proportions. | Service Department and Joint Cost Allocation Chapter 11 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin We have seen how cost allocation is used to develop the costs of products, services, and customers. However, part of the indirect cost incurred is from departments that do not directly produce the product or service but rather provide service to the departments that do produce the product or provide the service. In this chapter we will allocate the costs of these “service” departments. We will also consider product costing when multiple products are produced from the same inputs in fixed proportions. Service Department Cost Allocation Service Department: Department that provides services to other subunits in the organization. User Department: Department that uses the functions of service departments. L.O. 1 Explain why service costs are allocated. 11 - A service department does not directly produce the product or service but rather provide service to the departments that do produce the product or provide the service. For example, an information systems department is a service department that provides information system support to other departments and a payroll department provides payroll services to other departments. The departments using these services are the user departments. User departments could be other service departments or production or marketing departments that produce or market the products. Cost Allocation: Direct Method L.O. 2 Allocate service department costs using the direct method. Service Department: Information Systems (S1) User Department: Hilltop Mine (P1) Service Department: Administration (S2) User Department: Pacific Mine (P2) Direct method: Charges costs of service departments to user departments without making allocations among service departments. 11 - The direct method of service department cost allocation charges costs of service departments to user departments without . | Service Department and Joint Cost Allocation Chapter 11 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin We have seen how cost allocation is used to develop the costs of products, services, and customers. However, part of the indirect cost incurred is from departments that do not directly produce the product or service but rather provide service to the departments that do produce the product or provide the service. In this chapter we will allocate the costs of these “service” departments. We will also consider product costing when multiple products are produced from the same inputs in fixed proportions. Service Department Cost Allocation Service Department: Department that provides services to other subunits in the organization. User Department: Department that uses the functions of service departments. L.O. 1 Explain why service costs are allocated. 11 - A service department does not directly produce the product or service but rather