Exam 10: Managing and Allocating Support-Service Costs

Activity-Based-Costing (ABC) cost drivers should reflect cause and effect relations between resource spending and use.

Which of the following would not be an appropriate cost-allocation base for the Personnel department costs?

While costly to set up, once implemented, a complex cost allocation system is inexpensive to maintain.

Accuracy should be the only consideration in choosing the appropriate approach for allocating support service costs.

Bruce Consulting has two service departments: S1 and S2 and three production departments: P1, P2, and P3. Data for a recent month follow: Required: a) Determine the allocations to the production departments when the reciprocal method is used. b) Briefly describe why the reciprocal method is theoretically preferable to other methods of allocation.

Quick Credit Checks produces two styles of credit reports: personal and corporate. The difference between the two is the amount of background information and data collection required. The corporate report uses more skilled personnel because additional checking and data are required. The relevant figures for the year just completed follow: Total support service costs to be allocated are $3,200,000. Required: (a) Which method would be preferred by each manager? Which method would be least preferred? (b) Provide arguments that each manager would make for his/her preferred method. How would each manager argue against his/her least preferred method?

Bancroft, Fellouris, and Tanner, Inc. is a large multinational consulting company. The company has eight divisions and five service departments: Facilities, Printing, Library, Human Resources, and Accounting/ Finance. The facilities department handles all building maintenance, cost of heat, water, insurance and other facility-related costs. The company has three types of space: office space, computer space which is the most expensive due to special conditioning required at all times and warehouse space for its manufacturing division. The print shop prints all proposals, job bids, special advertising materials, accounting and finance documents and any materials requested by the divisions. The library, staffed by two full time librarians, maintains research materials and personal computers, purchases periodicals and books requested by the consulting divisions. Human resources handles all job applications, on-the-job training and payroll for both corporate and division employees, while accounting and finance performs corporate budgeting, allocations, billing for all divisions, maintains travel and petty cash desks for the extensive travel performed by the consulting divisions. Cost allocations and budgets, which are used to determine overhead rates for the divisions, are very important due to the high percentage of government contracts. Required: (a) The company wishes to use a step-method of allocation. Suggest how you would go about determining which service department should be the first step and which should be the last. What considerations would go into your decision? (b) Suggest appropriate cost allocation bases for the five service departments. (Based on an actual publicly held company)

Which of the following shows an inappropriate cost allocation base?

Which of the following statements regarding cost allocations isFalse?

The number of employees in a department would be an appropriate cost allocation base of allocating the Personnel Department cost to other departments.

In order for allocations to be fair to all departments, all resources should be allocated to user departments, whether or not they were consumed by the departments.

The direct-method ignores interactions among service departments.

Use the following to answer questions: A summary of the usage of the service department services by other services departments as well as by two producing departments is as follows: Direct costs in the various departments are as follows: -If the step-method of allocation is used, how much would be allocated from S1 to P1?

What will be the total costs of the machining department, assuming Hampton uses the step-method to allocate the costs of service departments?

The step method ignores any services provided to the largest service department from other service departments.

Using fewer cost pools will generally result in cost allocations that match resource use better than using multiple cost pools.

Use the following to answer questions: The following costs were incurred in three operating departments and three service departments in Gagetown Molding Company: The use of services by other departments is as follows: The following questions refer to a system of simultaneous linear equations that allocate costs using the reciprocal method. -The equation for Department P3 (marketing) is:

(a) Explain why the use of a single-cost driver such as the number of courses may result in inaccurate management information as to the cost of running courses in individual academic departments. (b) For each of the indirect costs listed below, identify an appropriate cost-driver that might be ? Computer use ? Facility use ? Student services ? Course design ? Lecturing/class meeting time ? Assignment grading Cost allocation bases are factors that cost management analysts use to assign indirect costs to cost objects. Ideally, cost-allocation bases should reflect a cause-and-effect relationship between resource spending and use. Ideally, an Activity-Based-Costing (ABC. approach will provide a more accurate and useful accounting for an organization's resources. Recent studies have found that, in spite of increasing costs and diminishing resources, very few Higher Education Institutions use the tools and techniques of an ABC cost allocation system to assign costs to academic departments. While direct costs, such as faculty salaries, are traceable to individual academic departments or courses, many indirect costs, such as facility use, computer use, and student support services, are more difficult to assign. In a traditional approach, many higher education institutions assign such costs based on a single factor, such as the number of courses taught in the university. (Source: Activity-Based Costing for Higher Education Institutions, Management Accounting Quarterly, Winter, 2001) Required:

The space occupied by a department would be an appropriate cost allocation base for allocating the cost of the accounting department to other departments.

What are the similarities and differences among the direct-method, the step-method and the reciprocal-method of allocating service costs? Is there any difference in the total amount of service department costs that will be allocated among the three methods?