managerial accounting ed 15 chapter 11b

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Service Department ChargesAppendix 11B

11B-2

Learning Objective 6

Charge operating departments for services

provided by service departments.

11B-3

Service Department Charges

Operating Operating DepartmentsDepartments

Carry out central Carry out central purposes of purposes of organization.organization.

Service Departments

Do not directly engage in operating activities.

11B-4

Reasons for Charging Service Department Costs

To encourage operating departments to wisely use service

department resources.

To encourage operating departments to wisely use service

department resources.

To provide operating departments with

more complete cost data for making

decisions.

To provide operating departments with

more complete cost data for making

decisions.

To help measure the profitability of

operating departments.

To help measure the profitability of


To create an incentive for service

departments to operate efficiently.

To create an incentive for service

departments to operate efficiently.

Service department costs are charged to operating departments for a variety of reasons including:

11B-5

$

Transfer Prices

OperatingDepartments

ServiceDepartments

The service department charges The service department charges considered in this appendix can be considered in this appendix can be viewed as a transfer price that is viewed as a transfer price that is charged for services provided by charged for services provided by service departments to operating service departments to operating

departments. departments.

The service department charges The service department charges considered in this appendix can be considered in this appendix can be viewed as a transfer price that is viewed as a transfer price that is charged for services provided by charged for services provided by service departments to operating service departments to operating

departments. departments.

11B-6

Charging Costs by Behavior

Whenever possible,Whenever possible,variable and fixedvariable and fixed

service department costsservice department costsshould be chargedshould be charged

separately.separately.

11B-7

Variable servicedepartment costs should be

charged to consuming departmentsaccording to whatever activity

causes the incurrence of the cost.


11B-8

Charge 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.

Charge 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 ofAre based on amounts ofcapacity each consumingcapacity each consuming

department requires.department requires.

Should not vary fromShould not vary fromperiod to period.period to period.


11B-9

Should Actual or Budgeted Costs Be Charged?

Budgeted variableand fixed service departmentcosts should be charged to


11B-10

Sipco has a maintenance department and two operatingdepartments: Cutting and Assembly. Variable maintenance

costs 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

11B-11

Actual hours

Sipco: End of the Year

11B-12

Percent of peak-period capacity.

Sipco: End of the Year

Actual hours

11B-13

Quick Check 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:

Percent ofPeak-Period Capacity Miles Miles

Hospitals Required Planned UsedMercy 45% 15,000 16,000 Northside 55% 17,000 17,500 Total 100% 32,000 33,500

11B-14

Quick Check

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


11B-15

Quick Check



11B-16

Allocating fixed costs using a variable

allocation base that fluctuates period to

period.

Pitfalls in Allocating Fixed Costs

11B-17

Using salesdollars as an

allocation base.

Pitfalls in Allocating Fixed Costs

Sales of one departmentinfluence the service

department costsallocated to other

departments.

11B-18

Autos 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.

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.

11B-19

Autos R Us – First-year Allocation

New Used Parts TotalSales by department 1,500,000$ 900,000$ 600,000$ 3,000,000$ Percentage of total sales 50% 30% 20% 100%Allocation of service department costs 40,000$ 24,000$ 16,000$ 80,000$

Departments

$1,500,000 ÷ $3,000,000 50% of $80,000

In the next year, the manager of the New Cars departmentincreases sales by $500,000. Sales in the other departments

are unchanged. Let’s allocate the $80,000 service departmentcost for the second year given the sales increase.

In the next year, the manager of the New Cars departmentincreases sales by $500,000. Sales in the other departments

are unchanged. Let’s allocate the $80,000 service departmentcost for the second year given the sales increase.

11B-20

Autos R Us – Second-year Allocation

New Used Parts TotalSales by department 2,000,000$ 900,000$ 600,000$ 3,500,000$ Percentage of total sales 57% 26% 17% 100%Allocation of service department costs 45,714$ 20,571$ 13,715$ 80,000$

Departments

$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.

If you were the manager of the New Cars department, you would likely complain about the increased service department

costs allocated to your department.

11B-21

End of Appendix 11B