Question

1. What types of costs are allocated? What is a support department? What is a producing department? What types of costs are allocated? Why is cost allocation important for companies to consider?

2. What are the differences between single charging rate and multiple charging rates? What factors might a company consider when determining how to allocate support department costs to a producing department? Give some examples of a type of support department costs and why it might be reasonably allocated to a producing department or departments.

3. What are the three methods of allocation and what are the differences between them? Why might a company choose one method over another?

4. After allocation of overhead to a producing department, how are overhead costs tied to production?

Answer 1

1). Costs which are not directly identifiable to a department or product are allocated to revenue generating department or products.
Support Department is the department which provides its services to other production or revenue generating departments. Its services are ancillary or in support to enable main departments to provide its services or selling products.
Producing Department is where actual production of goods occur means processes for converting raw material into finished goods occur.
Companies allocate cost to revenue generating departments for calculating the total cost involved in manufacturing of products which is taken into consideration for setting the appropriate selling price.

2). Single charging rate is rate determined on the basis of single cost allocation method. For example all the overheads are allocated on the basis of direct labour hours or Machine hrs or any other allocation basis.
Multiple charging rates is rates determined on the basis of multiple cost allocation methods. For example Overheads are first divided into various activities and then cost related to those activities are allocated on the basis of levels of those activities in various departments or different products. This is Activity Based Costing method.

Factors which company should consider for determining the allocation basis of cost includes the usage of services of support departments by the producing departments. This can be on the basis of no. of employees or area occupied by the producing departments or No.of types of products made by the producing departments etc.

Example of support department costs includes Maintenance Cost, Human Resources costs etc.