Biology Forums - Study Force

The manager of the Finishing Department is concerned about how the costs of service departments are being assigned to the Mixing Department. He knows that his department uses support activities entirely different from the other production departments. As a matter of fact, when something goes wrong in the Mixing Department the entire plant has to stop production because of the critical nature of the chemical processing in that department. Several support departments, such as maintenance and clean-up stop whatever they are doing and come to help the Mixing Department. However, it appears that the Mixing Department is not assigned any additional support costs because all support costs are assigned on the basis of actual outputs.

Required:
Explain the methods available for the allocation of costs from one department to another. Which method would you recommend for this company and why?

The single-rate method groups all costs into one cost pool and allocates them to cost objects using one rate from the single allocation base. The dual-rate method groups costs into separate cost pools, each of which may be allocated on a different base. The most common differentiation is between fixed and variable costs.

This company needs to use a dual method so that the extra time of Department 41 can be isolated and charged to it. This would still allow the other departments to share in the overall fixed costs of the emergency situation services without having to bear the variable costs of the repairs and clean-up.

Another aspect of cost allocation to be considered is the use of the direct, step-down, and reciprocal methods. Especially, the reciprocal method might reduce some of the problems being encountered.