Cost Allocation Report: Methods, Calculations, and Analysis

This report delves into the realm of cost allocation within management accounting, focusing on the allocation of service department costs to operating departments. The report highlights the importance of accurate cost allocation for financial reporting and provides calculations for overhead costs based on machine hours and labor expenses. The direct method of cost allocation is employed, with examples of service departments like personnel and maintenance. The report also mentions the existence of other methods, such as indirect and reciprocal methods. The choice of the allocation base, such as machine hours or direct labor hours, is crucial as it directly impacts the reported profits. The report references Lumen learning (2019) to support the concepts discussed.

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MANAGEMENT
ACCOUNTING

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The following are the relevant calculations:
Service departments
Particular
s Forming
Packagin
g Personnel Maintenance Total
Overheads
11,300
.00
16,25
0.00
6,30
0.00
5,3
80.00
Machine
hours
28,400
.00
18,95
0.00
Labour
hours
18,000
.00
23,75
0.00
Labour
expenses
5,04,600
.00
5,59,22
0.00
33,65
0.00
57,4
00.00
Part
a Personnel
2,988
.27
3,31
1.73
6,300.
00
6300 in
504600:559
220
Maintenan
ce
3,226
.86
2,15
3.14
5,380.
00
5380 in
28400:1895
0
Part
b
Overhead
on the basis
of labour
hours
0.6
278
0.6
842
Overhead
on the basis

MANAGEMENT ACCOUNTING 3
of machine
hours
Part
c
Overhead
on the basis
of machine
hours
0.3
979
0.8
575
The costs that pertains to the various service departments are allocated between the various
operating departments since the service departments exist for the purposes of supporting the
operating departments. The examples of this includes the maintenance, administration,
cafeterias etc. the service departments exist for the purposes of providing ancillary services
between the various departments of production and at the same time, the accountants must go
on to allocate these costs amongst the various operating departments. This is done for the
purposes of reporting since the costs allocation would help in the prediction of clear and
accurate financial facts of the company. Hence, in the above given example too, the overhead
costs of the personnel and the maintenance departments which are the service departments
are allocated between the production departments which are the forming and packaging
departments using the direct method of cost allocation. For this, the machine hours and the
labour expenses have been used.
Usually, there are 3 different methods of allocating the costs. The first being the direct
method which has been used, the second being the indirect method and the third being the
reciprocal method. when the managers of the company chooses base for the purposes of
allocating these costs, then the benefits that have been received and the fairness of each of
such method is considered. The example of this includes the use of the machine hours, direct
labour hours etc. (Lumen learning, 2019).
The company has to carefully choose the method of allocating costs since that affects the
profits that are reported in the financials of the company.

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References:
Courses.lumenlearning.com. (2019). Allocation of Service Department Costs | Managerial
Accounting. [online] Available at:
https://courses.lumenlearning.com/sac-managacct/chapter/allocation-of-service-department-
costs/ [Accessed 13 Sep. 2019].