CHAPTER 6
SUPPORT DEPARTMENT COST ALLOCATION

LEARNING OBJECTIVES

AFTER STUDYING THIS CHAPTER, YOU SHOULD BE ABLE TO:
1. Describe the difference between support departments and producing departments.
2. Explain five reasons why support costs may be assigned to producing departments.
3. Calculate charging rates, and distinguish between single and dual charging rates.
4. Allocate support center costs to producing departments using the direct method, the sequential method, and the reciprocal method.
5. Calculate departmental overhead rates.

CHAPTER SUMMARY

THIS CHAPTER FIRST DIFFERENTIATES SUPPORT DEPARTMENTS FROM PRODUCING DEPARTMENTS. THE COSTS OF SUPPORT DEPARTMENTS ARE COMMON TO ALL PRODUCING DEPARTMENTS AND MUST BE ALLOCATED TO THEM TO SATISFY MANY IMPORTANT OBJECTIVES. GIVEN THAT THE CAUSAL FACTORS CAN DIFFER FOR FIXED AND VARIABLE COSTS, A DUAL RATE CHARGING METHOD IS PREFERRED TO ALLOCATE THE VARIABLE AND FIXED COSTS SEPARATELY. THREE METHODS ARE INTRODUCED TO RECOGNIZE VARIOUS DEGREES OF SUPPORT DEPARTMENT INTERACTION CONSIDERED. WHILE THE DIRECT METHOD ALLOCATES SUPPORT DEPARTMENT COSTS ONLY TO THE PRODUCING DEPARTMENTS, THE SEQUENTIAL METHOD AND THE RECIPROCAL METHOD ALLOCATE SUPPORT SERVICE COSTS AMONG SOME (OR ALL) INTERACTING SUPPORT DEPARTMENTS BEFORE ALLOCATING COSTS TO THE PRODUCING DEPARTMENTS. UPON ALLOCATING ALL SUPPORT DEPARTMENT COSTS TO PRODUCING DEPARTMENTS, AN OVERHEAD RATE CAN BE COMPUTED FOR EACH PRODUCING DEPARTMENT IN ORDER TO DETERMINE THE PRODUCT’S UNIT COST.

CHAPTER REVIEW

I. AN OVERVIEW OF COST ALLOCATION

Cost allocation is required to assign common resource costs to cost objects or common costs. Common costs occur when the same resource is used in the output of two or more services or products. Allocation is a means of dividing a pool of costs and assigning it to various subunits. Thus, allocation does not affect the