Accounting

Methods of allocation of utility costs to producing departments

The number and types of service departments in a company depend on its operations and the degree of expense control desired. Service departments used for illustrative purposes are: (1) materials handling, (2) inspection, (3) utilities, and (4) general plant services.

Method of allocation of utility costs to producing departments

Inspection: For cost control, inspection costs are treated in the same manner as other service department costs. However, in certain instances, a special work order may require additional inspection or testing. This type of inspection cost is chargeable to the order and must be so identified. To accumulate these specific charges, separate cost centers may be established for the purpose of charging time and materials for special inspections.

Utilities: Power and fuel are consumed for two major purposes: for operating manufacturing facilities such as machines , electric welding, and cranes, and for what might be termed “working condition” purposes lighting, cooling, and heating. In most instances, a single billing is received for electric power or natural gas. It is not possible to determine directly the consumption for each of the above purposes to say nothing of the consumption by specific departments, cost centers, or functions.

However, a direct departmental allocation of utility costs is often desirable and also possible. A common method used is to install separate meters to measure power or fuel consumed by specific types of equipment. In other instances separate power sources (fuel, natural gas, coal, or electricity) may be used for different facilities or equipment making it possible to determine an individual utility cost by department.

For purposes of departmental and product costing, two methods of accounting for costs of utilities are recommended.

Direction to Allocation of utility costs as:

1. Charge all power and fuel costs to a separate utilities department; then allocate to benefiting departments.

2. Charge specific departments with power or fuel cost if separate meters are provided, and charge the remaining power and fuel costs to a separate utilities department or to general plant; this remainder is then allocated to benefiting departments.

Allocation of utilities costs to specific departments is based on special studies that determine each department’s horsepower of machines, number of machines, etc.

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