Question

Leap State College has a business college with three different products not limited to undergraduate degrees, graduate degrees, and executive educational certificates. Leap State has three service departments, Technical Support, Career Development, and the College Library. The Assistant Dean would like to measure product line profitability and wants to include an allocation of service department costs in the analysis.

Questions:

1. How would you recommend the service department costs be allocated?
2. Give examples of possible allocation bases used to allocate support-department cost pools at Leap State service departments.

Answer 1

1) The service department cost should be allocated based on service utilised by the other service and operating departments. The cost of each service department can be allocated to other department based on step allocation method or reciprocal method. A step method considers the allocation to other service department in a sequential way when few service departments only give support to other service department. Reciprocal method allocates service department costs mutually when service department gives and take support from other service department. In the given case of Leap State College, Step method of allocation is recommended because Technical service department gives service to all service departments and College Library renders service to Career development department

2) Possible allocation bases

· Technical operating department – The number of technical hours spent in supporting the other department can be used as the basis for allocation.

· Career Development – The career development hours availed by each course can be used as allocation base

· College Library –The library hours availed by each department can be used as allocation base for allocation of overheads