Question

Service (support) Department costs can't be traced to cost object and therefore must be allocated to the operating department they use the service. What four criteria are used to allocate costs?

Option 1: By the number of employees in each operating department
Option 2: Based on the square footage of each operating department
Option 3: Proportional to the direct labor hours used by each operating department
Option 4: According to the number of transactions processed by each operating department

Answer 1

Service (support) Department costs can be allocated to operating departments based on various criteria: number of employees, square footage, direct labor hours, and number of transactions processed in each department. The choice depends on how closely the criteria reflect the use of services by each operating department.

Step-by-step explanation:

The allocation of Service (support) Department costs to operating departments can be based on different criteria, reflecting how the services are consumed by each department. Four common criteria for cost allocation are:

• By the number of employees in each operating department
• Based on the square footage of each operating department
• Proportional to the direct labor hours used by each operating department
• According to the number of transactions processed by each operating department

Organizations can select the most suitable criterion based on the nature of the support service, the relationship between service consumption and the activity driver (criterion), and the ease of measurement.

Choosing the appropriate criterion helps in accurately distributing the service department costs among the operating departments benefiting from the services.