Cost Management: Measuring, Monitoring, and Motivating Performance, 2nd Edition

CHAPTER 8

Measuring and Assigning Support Department Costs

In Brief

When managers and accountants consider the cost of their goods and services, they typically focus on production costs. However, it is sometimes useful to measure and monitor the cost of all resources used to create a product or service. When all of an organization's costs are allocated, each unit's cost includes not only allocated production costs, but also allocated costs of internal support such as accounting, purchasing, and marketing. These costs are particularly important when measuring and monitoring the cost of services provided by private and public not-for-profit organizations. They also help determine reimbursements under cost-based contracts, such as those in the defense industry. However, problems arise when support department allocations are used inappropriately in decision making or to motivate behavior.

This Chapter Addresses the Following Questions:

• Q1 What are support departments, and why are their costs allocated to other departments?
• Q2 What process is used to allocate support department costs?
• Q3 How is the direct method used to allocate support costs to operating departments?
• Q4 How is the step-down method used to allocate support costs to operating departments?
• Q5 How is the reciprocal method used to allocate support costs to operating departments?
• Q6 What is the difference between single- ...