Some firms choose the order of allocation based on the costs in the individual service departments. Consider the case of CCC where Administration is the service department with the higher direct costs. Compute the service cost allocated to each mine (Hilltop and Pacific) using the step method. Start by allocating Administration costs first. Recall that Administration’s direct cost is $5,000,000 and Information Systems’ is $800,000. See Exhibit 11.2 for service department use data.
Exhibit 11.2 Basic Data for Service Department Cost Allocation—Carlyle Coal Company
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A |
B |
C |
D |
E |
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1 |
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Service Department |
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2 |
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Information Systems (S1) |
Administration (S2) |
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3 |
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Usage |
Percent |
Usage |
Percent |
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4 |
Departments |
(hours) |
of Total |
(employees) |
of Total |
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5 |
Administration |
100,000 |
50% |
–0– |
0% |
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6 |
Information Systems |
–0– |
0 |
2,000 |
20 |
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7 |
Hilltop Mine (P1) |
20,000 |
10 |
5,000 |
50 |
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8 |
Pacific Mine (P2) |
80,000 |
40 |
3,000 |
30 |
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9 |
Total |
200,000 |
100% |
10,000 |
100% |
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10 |
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Management systems that an important aspect of cost allocation is deciding which allocation base to use. Because we have already spent a great deal of time on the choice of cost allocation bases, we simply specify that CCC has determined that the best allocation base for Information Systems is computer hours and the best allocation base for Administration is number of employees.