Question

Allocation Base for Service Departments. Valencia Company has 15 production departments and produces hundreds of products. Service department costs are allocated to production departments using the direct method. Five service departments provide the following services to the production departments.

1. The Computer Technology department provides computer support.

2. The Personnel department posts job openings, hires employees, and coordinates employee benefits.

3. The Accounting department processes accounting data, provides financial reports, and performs general accounting duties.

4. The Maintenance department maintains buildings and equipment.

5. The Legal department provides legal services.

Required:

1. For each service department, provide a possible allocation base. Explain why the base you chose for each service department is reasonable.

2. Does the direct method provide for allocations from one service department to another? Explain.

Answer 1

1) Possible allocation base with explanation

i. Computer support hours served in each department is the allocation base. The hours represent the right way of charging the cost because it is technical help given and time is spent on each support ticket is the basis to allocate.

ii. Number of employees recruit is the allocation base. The Personnel department recruits employees for various departments. Hence the number of employees recruited to other department should be the right allocation base to allocate overheads

iii. The accounting man hours spent for each department can be the basis for allocating overheads to the other department. Accounting department team renders service to the other department and hours spent in serving each department is the right way to allocate cost

iv. The square feet of buildings and equipment occupied can be the basis for allocation of maintenance cost. The maintenance is incurred based on area coverage and hence it represents the right allocation base

v. The number of legal service hours in service rendered to other department can be the basis in allocation of overheads to other department. Legal service is a professional service rendered to other departments for legal related issues and it represents the right base.

2) Direct method allocates the service departmental cost only to the operating or production department. It ignores the service rendered by one service department to another service department. It allocates cost one way from service department to operating department only.