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

Exercise 17

Surf Beach State College (SBSC) has a business school with three products, undergraduate degrees, graduate degrees, and executive education. SBSC has three service departments, Computer Support, Career Development, and the Library. The dean would like to measure product line profitability and wants to include an allocation of service department costs in the analysis. How would you recommend the service department costs be allocated?

Step 1 of 2

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.