Appendix 4B: Service Department Allocations

Service Department AllocationsAppendix 4BOperating DepartmentsAn operating department carries out the central purpose of the organization. The Surgery Department at Mount Sinai Hospital.The Production Departments at Mitsubishi. The Geography Department at the University of Washington.Service Departments Service departments do not directly engage in operating activities. The Accounting Department at Macy’s.The Human Resources Department at Walgreens.The Cafeteria at Genesco.The Internal Audit Department at Exxon.Interdepartmental ServicesServiceDepartmentOperatingDepartmentCosts of the service department become overhead costs to the operating department.Allocation ApproachesReciprocal ServicesServiceDepartment 1ServiceDepartment 2When service departments provide services to each other we call them reciprocal services.Direct MethodService Department(Cafeteria)Service Department(Custodial)Operating Department(Machining)Operating Department(Assembly)Interactionsbetween servicedepartments areignored and allcosts areallocated directlyto operatingdepartments.Operating Department(Machining)Operating Department(Assembly)Step-Down MethodService Department(Cafeteria)Service Department(Custodial)Once a servicedepartment’s costsare allocated, other servicedepartment costsare not allocatedback to it. Step-Down Method There are three key points to understand regarding the step-down method:  In both the direct and step-down methods, any amount of the allocation base attributable to the service department whose cost is being allocated  is always ignored.  Any amount of the allocation base that is attributable to a service department whose cost  has already been allocated is ignored.  Each service department assigns its own costs to operating departments plus the costs that have been allocated to it from other service departments.Reciprocal MethodInterdepartmentalservices are givenfull recognitionrather than partialrecognition as withthe step method. Service Department(Cafeteria)Service Department(Custodial)Operating Department(Machining)Operating Department(Assembly)Because of its mathematical complexity, the reciprocal method is rarely used.End of Appendix 4B