Question

1. Why does support department cost allocation matter to service businesses (such as colleges and universities)? Please explain the importance. Also, identify three businesses, companies, or non-profit organizations that you think would use support department cost allocation. Name the company and their corresponding support departments.

Answer 1

In every business Department Cost Allocation matter determines the costs incurred for a particular department and helps in determining the costs of any particular area of that department. It also helps in the decision making of any new investments to be made in the future and also to have any control on the extra costs incurred in any department.

Basically, there are three types of methods which are used for allocating the costs. And they are _

1. Direct Method: This method is the simplest and is used by most of the service companies and non-profit organisations. In this you have to identify whether the costs incurred for a department and the proportion of that service department's benefit which are used by different departments are in line with the projected costs.

2. Step Method: It simply attempts to mitigate and by allocating the service department which incurred largest costs to other departments, then the service department which incurred the next largest costs to other deparments and so on.

3. Reciprocal Method: Being the most accurate method, it uses linear algebraic method to allocate the costs to service departments. These costs are then allocated as per the variation in the direct method.

Importance & Benefits

1. Reducing Costs and increasing Profits.

2. Important in Decision Making System

3. Absolute Conrtrol over Unnecessary Costs

4. To justify the Costs for Pricing

5. To predict the economic effects of Planning

6. to Motivate the employees and Managers

Few Examples

1. Cafe Coffe Day in India has various products under its belt. Tea & Coffee, Shakes, Snacks and Desserts. All the expenses such as Salaries, Rent, Electricity and Water Costs are distributed in ratio to the sale of these items. Here , the owner is interested in finding out which product performed better or yielded potential Income.

2. Banks may also have with such kind of Cost Allocation. Such as Operations, Sales, Treasury and Cash. The respective Expenses are calculated and distributed accordingly. Expenses such as Rent for the Building, Utilities like Electricity and Water, Salaries of the employees etc.

3. Universities would have Cost Departments like Staff, Examination Panel / Section, Management, Board Members and Teachers etc. The respective expeneses are distributed to determine which department is lucrative.