Managing and Allocating Support-Service Costs Chapter 10.
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Managing and Allocating Support-Service Costs
Chapter 10
Productive vs. service functions
Productive functionsGenerate revenueProvide services/products to external
customers
Service functionsCost centersProvide services to internal customers
Productive functionsOther service functions
Support/service departments
Organizational units providing support to other segments of the organizationAccountingHuman resourcesInformation technologyMaintenancePurchasingEtc.
Allocation of service costsWhy?
All costs must be coveredService costs must be pushed down to productive
functions
nternal chargingPromotes more efficient use of internal services
Compliance with contracts
Required reportingRegulated 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 resourceRent, insurance, maintenance Square footageHeating/cooling Volume of spaceAccounting, data processing # of transactionsHuman resources, payroll # of employeesInformation technology # of computersPurchasing # of purchase
ordersMotor pool # of vehicles
Allocation methods
Direct method
Service costs allocated directly to productive functions
No inter-service function allocation
Ignores the services each service function provides to the other service functions
Direct method
Service #1Productive
#1
Service #2Productive
#2
Service #3Productive
#3
Department cost
EmployeesPurchase
ordersSquare footage
Human resources 240,000$ 10 40 2,000
Purchasing 142,000$ 8 25 1,500
Maintenance 620,000$ 12 150 1,000
Surgery 3,285,000$ 50 90 3,600
Emergency 2,756,000$ 30 120 6,600
Radiology 930,000$ 20 90 1,800
Example
Direct methodSurgery Emergency Radiology
Human resources 240,000$ 120,000$ 72,000$ 48,000$
(50/100) (30/100) (20/100)
Purchasing 142,000$ 42,600$ 56,800$ 42,600$
(90/300) (120/300) (90/300)
Maintenance 620,000$ 186,000$ 341,000$ 93,000$
(3,600/12,000) (6,600/12,000) (1,800/12,000)
Service cost 1,002,000$ 348,600$ 469,800$ 183,600$
Department cost 6,971,000$ 3,285,000$ 2,756,000$ 930,000$
Total cost 7,973,000$ 3,633,600$ 3,225,800$ 1,113,600$
Allocation methods
Step method
Most wide-spread service cost allocated to other service and productive functions
Next most wide-spread service cost is allocated to remaining service and productive functions
Recognizes some of the inter-service function services
Service #1Productive
#1
Service #2Productive
#2
Service #3Productive
#3
Step method
Step methodHuman
resources Purchasing Maintenance Surgery Emergency RadiologyService cost 240,000$ 142,000$ 620,000$
Human resources (240,000)$ 16,000$ 24,000 100,000$ 60,000$ 40,000$ (8/120) (12/120) (50/120) (30/120) (20/120)
158,000$
Purchasing (158,000)$ 52,667 31,600$ 42,133$ 31,600$ (150/450) (90/450) (120/450) (90/450)
696,667$
Maintenance (696,667)$ 209,000$ 383,167$ 104,500$ (3,600/12,000) (6,600/12,000) (1,800/12,000)
Service cost 340,600$ 485,300$ 176,100$
Department cost 3,285,000$ 2,756,000$ 930,000$
Total cost -$ -$ -$ 3,625,600$ 3,241,300$ 1,106,100$
One other method
Reciprocal methodConsiders all inter-service department
services
Most accurate
Allocation requires complex calculationsBeyond the scope of this course
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