Support Department and Joint Cost Allocation

Support Department and Joint Cost Allocation

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Support Department and Joint Cost Allocation

Not all departments or units of an organization are engages in the production of main end-product of the company. These units or departments are different from the operating departments of an organization, whose activities revolve around the primary purpose of the existence of an organization – the production of goods and services for the consumers. Support departments provide services that facilitate the smooth activities of the operating departments. The cost of service support departments are allocated to the corresponding operating departments. This is because they exist for the sole purpose of supporting the operating departments. Some examples of service operating departments include administration and maintenance. Service departments help multiple departments of an organization simultaneously. Therefore, an organization should allocate and account for all the costs. The allocation of support service department is not only important in manufacturing setting for determining the production costs. It is also important among in-service businesses such as universities and hospitals.

An organization can use three methods in the allocation of service department costs. These include the direct method, step method, and reciprocal method. The direct method involves the allocation of costs to each department based on the allocation base of each department. This method ignores other service departments.

On the other hand, the step method allocates costs to operating departments and other service departments within the organization in a sequential manner. The sequence usually starts with the service department that has incurred the highest costs. The costs of the service department with the next highest costs is then allocated. This goes on until the service department with the lowest cost is has its cost allocated (Mowen, Hansen, & Heitger, 2016).

Finally, the reciprocal method acknowledges the relationship between various service departments. This implies that the costs of the service departments are allocated to and from other departments.

The allocation of support departments is important among in-service organization since any errors in the method chosen would have a significant impact on the accuracy of the accounting method. It may lead to the inflation of deflation of the costs of the operations of the in-service organization. This may make it difficult for the organization to determine its actual financial position (Warren, & Tayler, 2020).

In conclusion, the allocation of costs to service support departments is vital to the operations of any organization. It helps in determining the actual operating costs of an organization, which helps it in financial planning. Failure to use the right method in the allocation of the costs of the service support departments may jeopardize the financial position of an organization.

Reference

Mowen, M. M., Hansen, D. R., & Heitger, D. L. (2016). Managerial accounting: The cornerstone of business decision-making. Boston, MA: Cengage Learning.

Warren, C. S., & Tayler, W. B. (2020). Managerial accounting (15th ed.). Boston, MA: Cengage Learning.