University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

172

Pages:

2
Author:

stud_ice13

Steps to Allocate Indirect and Service Department Expenses 1. Understanding Expense Types • • • Direct Expenses: Costs that are easily traceable to a single department and directly benefit only that department (e.g., employee salaries for specific department roles). These are not allocated across departments. Indirect Expenses: Costs shared by multiple departments, such as rent, utilities, and cleaning services. These are allocated across departments based on an appropriate allocation base. Service Department Expenses: Costs from departments that support other departments, like payroll or purchasing, which are essential for the operating departments but do not generate revenue themselves. 2. Choosing an Allocation Base • • Allocation bases should reflect how each department uses or benefits from the shared resources. Examples include: o Square footage for rent or utilities. o Number of employees for HR costs. o Total purchase orders for purchasing costs. Exhibits 22.4 and 22.5 provide commonly used bases, helping to match indirect or service expenses to benefiting departments. 3. Using the Cost Allocation Formula • Cost Allocation Formula: Allocated Cost to Department=(Department’s Usage of BaseTotal Usage of Base)×Total Indirect or Service Department Expense 4. Allocating Indirect Expenses (Example) • Example: Cleaning costs of $800 are shared by three departments based on square footage occupied. o Assume total square footage is 4,000 sq ft. o Departmental allocations:  Jewelry Department: 2,400 sq ft (60% of total space) → Allocated $480 (60% of $800).  Clothing Department: 1,200 sq ft (30% of total space) → Allocated $240 (30% of $800).  Electronics Department: 400 sq ft (10% of total space) → Allocated $80 (10% of $800). 5. Allocating Service Department Expenses (Example) • Example: Allocating a purchasing department’s $20,000 cost based on the number of purchase orders by each department. o Assume departments have the following purchase orders:  Jewelry: 100 orders.  Clothing: 300 orders.  Electronics: 600 orders. o Calculate each department’s share of purchase orders:  Total orders = 1,000 (100 + 300 + 600).  Jewelry: 1001,000×20,000=2,000  Clothing: 3001,000×20,000=6,000  Electronics: 6001,000×20,000=12,000 6. Preparing Departmental Income Statements • • • Direct Expenses: Recorded directly to each department’s income statement. Allocated Indirect and Service Department Expenses: Listed separately to show each department’s share. Summing direct, indirect, and service costs gives total expenses for each department, helping to assess departmental profitability and cost control. Sample Format for Departmental Income Statement: Department Jewelry Clothing Electronics $XXX $XXX $XXX $XXX $XXX $XXX Revenues Direct Expenses Allocated Indirect Expenses - Rent $XXX - Utilities $XXX Allocated Service Dept Expenses - Purchasing $2,000 $XXX Total Expenses $XXX Departmental Income $XXX $XXX $XXX $XXX $6,000 $XXX $XXX $12,000 $XXX $XXX This allocation method provides a comprehensive view of each department’s responsibility for shared costs, allowing management to evaluate departmental performance effectively.