Spending Variance on a Departmental Basis. In responsibility accounting, the emphasis rests upon the comparison of actual departmental expenses with budgeted or estimated costs exclusive of service department costs. In fact, many accountants believe that only the variable overhead (i.e., the controllable expenses for which management holds the department head responsible) should be compared and not the total overhead. Service department costs analysis is a time consuming effort.
Naturally in service department costs analysis, the procedure varies between different organizations. In this example, both procedures will be illustrated for the four producing departments and for the one service department: (1) total actual departmental overhead, both fixed and variable, is compared with budgeted or predetermined departmental overhead ; (2) only variable or controllable actual departmental overhead is compared with its budgeted or predetermined amount. Service department costs are excluded in both.
While the responsibility for the cost incurred is, generally speaking, easily identifiable in the producing departments, a service department costs variance need a great deal of additional investigation. service department costs analysis such as Utilities, the analysis is not so easy because;
1. Utilities can be charged accurately to consuming departments only when departmental or cost center meters are used.
2. Even with meters the quantity used might differ from the quantity produced due to line losses. The pinpointing of the responsibility for these losses is often impossible.
3. Since any utility can often be either purchased from outside or manufactured inside, it could be possible that the interchangeable use of one source with another will give rise to variances for which the cause is also difficult to detect.
4. Service department costs analysis is time consuming approach of an entity.
In simultaneous equation method of service department costs allocation, we generally establish simultaneous equations to get the accumulated balances of production departments. This method of allocation accurately allocates service department costs in the given percentages.