Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 15

Consider a company with two producing departments and one service department. The service department distributes its costs to the producing departments on the basis of the number of employees in each department. If the costs in the service department are fixed, what effect would the addition of employees in one department have on the costs allocated to the other department? Comment on the reasonableness of the situation.

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Cost accounting system

This is a system designed for inhouse or internal managers and their decision making. Cost accounting information is not needed for comparison with other companies. This information is commonly used in financial accounting also, but it is primarily used by company managers for their decision making. It is important that cost accounting information is relevant for the decision making of the manager.

Cost allocation of service departments

Service departments like human resource, administration, accounts, IT etc. render their services to other user departments which may include production or other service departments also. The costs of these service departments also need to be allocated among other user departments for product and departmental costing purposes. There are different methods used for service costs allocation like direct method, step method and reciprocal method.