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Chapter 11
Service Department and Joint Cost Allocation
McGrawHill/Irwin Copyright © 2011 by The McGrawHill Companies, Inc. All rights reserved.
Service Department Cost Allocation
L.O. 1 Explain why service costs are allocated.
• Service Department:
Department that provides services to other subunits in the organization.
• User Department:
Department that uses the functions of service departments.
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Cost Allocation: Direct Method L.O. 2 Allocate service department costs using the direct method.
• Direct method:
Charges costs of service departments to user departments without making allocations among service departments.
Service Department: Information Systems (S1)
User Department: Hilltop Mine (P1)
Service Department: Administration (S2)
User Department: Pacific Mine (P2)
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Cost Allocation: Step Method L.O. 3 Allocate service department costs using the step method.
• The step method allocates some service department costs to other service departments.
• Once an allocation is made from a service department no further allocations are made back to that service department.
• Generally, allocate in order of proportion of services provided to other service departments.
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Cost Allocation: Reciprocal Method L.O. 4 Allocate service department costs using the reciprocal method.
• The reciprocal method recognizes all services provided by any service department, including services provided to other service departments.
• It accounts for cost flows among service departments providing services to each other.
• It requires a simultaneous equation solution.
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