When computing departmental income, we make two decisions for allocating expenses. 1. How to allocate indirect expenses such as rent and utilities, which benefit several departments. 2. How to allocate service department expenses such as payroll and purchasing, which benefit several departments.

 Learning Objective 09-P2: Allocate indirect expenses to departments.

When computing departmental income, we make two decisions for allocating expenses. 1. How to allocate indirect expenses such as rent and utilities, which benefit several departments. 2. How to allocate service department expenses such as payroll and purchasing, which benefit several departments. Indirect expenses are costs incurred for the joint benefit of more than one department; they cannot be readily traced to only one department. Service department expenses are costs that benefit more than one department; they cannot be readily traced to only one department. The operating departments that perform an organization’s main functions, for example, manufacturing and selling, benefit from the work of service departments. Service departments do not generate revenues, but their support is crucial for operating department success.

 

Indirect and service department expenses are allocated across departments that _____ them.
 
multiple choice
use
benefit from Correct
provide
make

Explanation 
Indirect and service department expenses are allocated across departments that benefit from them. No standard rule for the “best” allocation bases exists. 

 

Explanation
Knowledge Check 01
   
Item #1:
An employee's contribution to a department usually depends on the number of hours worked in contributing to that department. Thus, a reasonable basis for allocating employee wages and salaries is the relative amount of time spent in each department.
 
Item #2:
Rent expense for a building is reasonably allocated to a department on the basis of floor space it occupies. The allocation methods can charge departments that occupy more valuable space, such as high customer traffic areas, a higher expense per square foot.
 
Item #3:
Depreciation on equipment used only in one department is a direct expense of that department. Depreciation on equipment used by more than one department is an indirect expense to be allocated across departments.

 

Explanation
 
Item #1:
Purchasing costs are normally allocated on the basis of the number of purchases or the number of purchase orders processed.
 
Item #2:
Payroll expenses are normally allocated based on the number of employees in each department.
 
Item #3:
Maintenance expenses are normally allocated on the basis of floor space occupied.

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