Question

. You are required to allocate the support department cost to operations department by taking any Saudi based operating company

Answer 1

SUPPORT DEPARTMENT COST ARE ALLOCATED TO OPERATING DEPARTMENT COST VIA AN ALLOCATION PROCESS

THIS ALLOCATION OCCURS TO SUPPORT FULL MEASUREMENT OF COST , TO MAKE MANAGERS OF OPERATING UNIT

AWARE OF THE COMPLETE COST OF THE ACTIVITIES, AND TO DISCOURAGE WASTE AND IN-EFFICIENCY BY OVER UTILIZATION OF SUPPORT DEPARTMENT.

-- FOLLOWING ARE THE METHODS TO ALLOCATE SUPPORT DEPARTMENT COSTS:-

1. DIRECT METHOD

THE DIRECT METHOD TRANSFER THE COST OF SUPPORT DEPARTMENT DIRECTLY TO THE OPERATING DEPARTMENT THAT RELY ON THEIR SERVICES. THIS ALLOCATION IS BASED ON SOME LOGICAL BENCHMARK

FOR EX. SAUDI PRINTING CO. HAS TWO OPERATING DEPARTMENT PRINTING AND BINDING. PRINTING IS HIGHLY AUTOMATED WHEREAS BINDING IS HIGHLY LABOR-INTENSIVE. THESE DEPARTMENTS ARE SUPPORTED BY MAINTENANCE AND CAFETERIA SERVICE UNITS ( ALSO CALLED SUPPORT DEPARTMENTS ). MAINTENANCE ACTIVITIES ARE DRIVEN BY THE AMOUNT OF MACHINERY REQUIRING SERVICE AND REPAIR. CAFETERIA SERVICE IS DIRECTLY RELATED TO THE SIZE OF LABOR POOL. SO COST INCURRED BY MAINTENANCE DEPARTMENT IS ALLOCATED ON THE BASIS OF NO. OF MACHINES USED BY EACH OPERATING DEPARTMENT. CAFETERIA COST IS ALLOCATED ON THE BASIS OF NO. OF EMPLOYEES IN EACH OPERATING DEPARTMENT.

2. INDIRECT METHOD

SOME SUPPORT DEPARTMENTS MAY PROVIDE SUPPORT TO OTHER SUPPORT DEPARTMENTS

FOR EXAMPLE. EMPLOYEES OF MAINTENANCE DEPARTMENT ALSO USES THE SERVICE OF CAFETERIA DEPARTMENT

THIS PROBLEM IS SOLVED BY A ' STEP METHOD ' OF ALLOCATION

A SUPPORT DEPARTMENT COST IS FIRST ALLOCATED TO OTHER UNITS , INCLUDING OTHER SUPPORT DEPARTMENTS . THEN THE "RESULTING COST" OF OTHER SUPPORT DEPARTMENTS ARE ALLOCATED TO OPERATION DEPARTMENT.