Allocate service department costs to production departments: Instead of closing all service department overhead directly to producing departments, some overhead may first be charged to other service departments or to general factory overhead. In some companies, service department expenses are transferred only to producing departments.
This procedure avoids much clerical work. It can be justified if no material difference in the final costs of a producing department results when the expenses of a service department are not prorated to other service departments or to general plant. However, this procedure fails to measure the total cost for individual service departments.
Allocate service department costs to production departments: When following the rule stating that service department expenses should be transferred on the basis of the use made of the respective services by all benefiting departments, both producing and service, the usual procedure is to transfer expenses of service departments in the order of the amount of service rendered by the departments; i.e., expenses of the department rendering the greatest amount of service are transferred first.
When service rendered by a department cannot be determined accurately, it is possible to distribute first the expenses of the service department which has the largest total overhead. This rule assumes that the department with the largest amount of expense rendered the greatest amount of service. Whether the amount of service or the amount of expense determines the order of distribution, once costs for a service department are distributed, that department is considered closed and no further distributions are made to it.
Since the illustration shows no transfer of service department costs to other service departments, the order of distribution does not matter. The distribution is made by starting with Materials Handling. The overhead of this department is distributed on the basis of the estimated cost of materials requisitioned per Schedule A; i.e., 45 percent of $28,300 == $12,735 to the Cutting Department.
Inspection costs are transferred to the producing departments Assembly and Upholstery only, on a 50-50 basis, because these two departments are the only ones receiving this type of service in equal amounts. Utilities costs are transferred in a threefold manner: 20 percent of the costs based on kilowatt-hours, 50 percent on horsepower-hours, and 30 percent on floor area. The amount of $13,080 represents 20 percent of $65,400, the total costs of the department. According to Schedule A, 20 percent of $13,080 = $2,616 is distributed to the Cutting Department. The same method is followed for the other costs and departments. General Plant is distributed on the basis of number of employees; i.e., 20 percent of $36,900 = $7,380 to the Cutting Department.Allocate service department costs to production departments wisely based on appropriate bases.