Cost Assignment Methods

Cost Assignment Methods-23
The Murphy Company has two service departments and two operating departments as shown below: The two service departments provide service to each other as well as to operating departments.

The Murphy Company has two service departments and two operating departments as shown below: The two service departments provide service to each other as well as to operating departments.

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However, accountants resort to indirect methods such as allocation when they cannot measure resource usage directly.

Examples in following sections show how they do this.

Under this method, the costs incurred by service departments are not allocated to each other; rather, they are directly allocated to operating departments using some appropriate allocation base.

In other words, we can say that the direct method of departmental cost allocation ignores the service provided by a service department to itself and to other service departments.

Required: Allocate the cost of service departments to operating departments using direct method of cost allocation.

3,000 square feet 22,000 square feet = 25,000 square feet.

Suppose, for example, a company has four departments – department A, department B, department C and department D.

The departments A and B are service departments whereas departments C and D are operating departments.

The core components of a cost allocation system consist of a way to track which organizations provides a product and/or service, the organizations that consume the products and/or services, and a list of portfolio offerings (e.g. Depending on the operating structure within a company, the cost allocation data may generate an internal invoice or feed an ERP system's chargeback module.

Accessing the data via an invoice or chargeback module are the typical methods that drive personnel behavior.

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