Selecting Allocation Base:
Costs are ordinarily assigned to products and
services by using a two stage process. In first stage, service department
and other costs are allocated to operating departments. In second stage, the
costs that have been assigned to operating departments are allocated to
products and services. Here we will focus on the first stage, in which
service department costs are allocated to operating departments.
In the first stage, service department costs are
allocated to operating departments by using a unique
allocation base for
each service department. The allocation base that is used to allocate a
particular service department's costs should "drive" those costs. For
example, the number of meals served would commonly be used as the allocation
base for cafeteria costs because the costs incurred in the cafeteria are
driven to a large extent by the number of meals served. Ideally the total
cost incurred in the service department should be directly proportional to
the allocation base. If the allocation base increases or decreases by 10%,
the service department cost should increase or decrease by 10% as well.
Managers also often argue that an allocation base should reflect as
accurately as possible the benefits that the various departments receive
from the service department. For
example the most managers would argue that square feet building space
occupied by each department should be used as the allocation base for
janitorial services because both the benefits and costs of janitorial
services tend to be proportional to the amount of space occupied by a
department. A given service department's cost may be allocated using more
than allocation base (see examples below). For example, data processing
costs may be allocated on the basis of CPU minutes for mainframe computers
and on the basis of number of personal computers used in each operating
department. In addition to explanation
of how to select an allocation base, another critical factor should not be
overlooked. The allocation base should be clear and straightforward and
easily understood by the managers to whom the costs are being allocated.
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Examples of Bases, Company
Used to Allocate Service Department Costs |
| Service Department
Landry
Airport ground services
Cafeteria
Medical facilities
Materials handling
Data processing
Custodial services (building and ground)
Cost accounting
Power
Human resources
Receiving, shipping, and stores
Factory administration
Maintenance |
Bases (Cost drivers)
Involved Ponds of Landry
Number of flights
Number of meals
Cases handled; number of employees; hours worked
Hours of service; volume handled
CPU minutes; lines printed; disk storage used; number of personal
computers.
Square footage occupied.
Labor hours; clients or patients serviced
KWH used; capacity of machines
Number of employees; employee turnover; training hours.
Units handled; number of requisitions; space occupied
Total labor hours
Machine hours |
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