Allocating support service costs
Questions
1. Distinguish between a service department and a production department. Give
an example of the counterpart of a manufacturer’s “production” department
in a bank.
A service department is a unit in an organisation that is not involved directly in
producing the organisation’s goods or services. However, a service department does
provide a service that enables the organisation’s production process to take place.
Production departments, on the other hand, are units that are directly involved in
producing the organisation’s goods and services. An example of a service
department in a bank would be the computer department or the personnel
department. An example of a “production” department in a bank would be the
consumer loan department.
2. Define the term reciprocal services.
The term reciprocal services refers to the situation in which two or more service
departments provide services to each other.
3. Explain briefly the main differences between the direct, step-down, and
reciprocal-services methods of service department cost allocation.
(a)
Under the direct method of service department cost allocation, all service
department costs are allocated directly to the production departments, and
none of these costs are allocated to other service departments.
(b)
Under the step-down method, a sequence is first established for allocation of
service department costs. Then the costs incurred in the first service
department in the sequence are allocated among all other departments that
use that service department’s services, including other service departments.
The method proceeds in a similar fashion through the sequence of service
departments.
(c)
Under the reciprocal-services method, a system of simultaneous equations is
established to reflect the reciprocal provision of services among service
departments. Then all of the service departments’ costs are allocated among
all of the departments that use the various service departments’ output of
services. The reciprocal-services method of service department cost
allocation is the only method that fully accounts for the reciprocal provision
of services among departments.
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Questions
1. Distinguish between a service department and a production department. Give
an example of the counterpart of a manufacturer’s “production” department
in a bank.
A service department is a unit in an organisation that is not involved directly in
producing the organisation’s goods or services. However, a service department does
provide a service that enables the organisation’s production process to take place.
Production departments, on the other hand, are units that are directly involved in
producing the organisation’s goods and services. An example of a service
department in a bank would be the computer department or the personnel
department. An example of a “production” department in a bank would be the
consumer loan department.
2. Define the term reciprocal services.
The term reciprocal services refers to the situation in which two or more service
departments provide services to each other.
3. Explain briefly the main differences between the direct, step-down, and
reciprocal-services methods of service department cost allocation.
(a)
Under the direct method of service department cost allocation, all service
department costs are allocated directly to the production departments, and
none of these costs are allocated to other service departments.
(b)
Under the step-down method, a sequence is first established for allocation of
service department costs. Then the costs incurred in the first service
department in the sequence are allocated among all other departments that
use that service department’s services, including other service departments.
The method proceeds in a similar fashion through the sequence of service
departments.
(c)
Under the reciprocal-services method, a system of simultaneous equations is
established to reflect the reciprocal provision of services among service
departments. Then all of the service departments’ costs are allocated among
all of the departments that use the various service departments’ output of
services. The reciprocal-services method of service department cost
allocation is the only method that fully accounts for the reciprocal provision
of services among departments.
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