Appendix 11B Learning Objective 6 Charge operating departments for services provided by service departments Operating vs Service Departments Operating Departments Carry out central purposes of organization ID: 760469
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Slide1
Service Department Charges
Appendix 11B
Slide2Learning Objective 6
Charge operating departments for services provided by service departments.
Slide3Operating vs. Service Departments
Operating Departments
Carry out central purposes of organization.
Service Departments
Do not directly engage in operating activities.
Slide4Reasons for Charging Service Department Costs
To encourage operating departments to wisely use service department resources.
To provide operating departments with more complete cost data for making decisions.
To help measure the profitability of operating departments.
To create an incentive for service departments to operate efficiently.
Service department costs are charged to operating departments for a variety of reasons including:
Slide5Transfer Prices
Operating
Departments
Service
Departments
The service department charges considered in this appendix can be viewed as a transfer price that is charged for services provided by service departments to operating departments.
Slide6Charging Costs by Behavior – Part 1
Whenever possible,
variable and fixed
service department costs
should be charged
separately.
Slide7Variable servicedepartment costs should becharged to consuming departmentsaccording to whatever activitycauses the incurrence of the cost.
Charging Costs by Behavior – Part 2
Slide8Charge fixed service department costs to consuming departments in predetermined lump-sum amounts that are based on the consuming department’s peak-period or long-run average servicing needs.
Are based on amounts ofcapacity each consumingdepartment requires.
Should not vary fromperiod to period.
Charging Costs by Behavior – Part 3
Slide9Should Actual or Budgeted Costs Be Charged?
Budgeted
variable
and fixed service department
costs should be charged to
operating departments.
Slide10Sipco has a maintenance department and two operatingdepartments: Cutting and Assembly. Variable maintenancecosts are budgeted at $0.60 per machine hour. Fixedmaintenance costs are budgeted at $200,000 per year.Data relating to the current year are:
Allocate maintenance costs to the two operating departments.
Sipco – An Example
Slide11Actual hours
Sipco – End of the Year – Part 1
Slide12Percent of peak-period capacity.
Sipco – End of the Year – Part 2
Actual hours
Slide13Quick Check 1
Foster City has an ambulance service that is used by the two public hospitals in the city. Variable ambulance costs are budgeted at $4.20 per mile. Fixed ambulance costs are budgeted at $120,000 per year. Data relating to the current year are:
Slide14Quick Check 1a
How much ambulance service cost will be allocated to Mercy Hospital at the
end
of the year?
a. $121,200
b. $254,400
c. $139,500
d. $117,000
Slide15Quick Check 1b
How much ambulance service cost will be allocated to Mercy Hospital at the end of the year?a. $121,200b. $254,400c. $139,500d. $117,000
Slide16Allocating fixed
costs using a variableallocation base that fluctuates period to period.
Pitfalls in Allocating Fixed Costs – Part 1
Fixed costs
allocated to one
department are
heavily influenced by
what happens in
other departments.
Slide17Using sales
dollars as anallocation base.
Pitfalls in Allocating Fixed Costs – Part 2
Sales of one department
influence the service
department costs
allocated to other
departments.
Slide18Autos R Us – An Example
Autos R Us has one service department and three sales departments, New Cars, Used Cars, and Car Parts. The service department costs total $80,000 for both years in the example. Contrary to good practice, Autos R Us allocates the service department costs based on sales.
Slide19Autos R Us – First-year Allocation
$1,500,000 ÷ $3,000,000
50% of $80,000
In the next year, the manager of the New Cars department
increases sales by $500,000
.
Sales in the other
departments are
unchanged
.
Let’s allocate the $80,000 service
department cost
for the second year given the sales increase.
Slide20Autos R Us – Second-year Allocation
$2,000,000 ÷ $3,500,000
57% of $80,000
If you were the manager of the New Cars department, you would likely complain about the increased service department costs allocated to your department.
Slide21End of Appendix 11B