CHAPTER 11 Costing and pricing in an entity 475The full cost for each department can now be calculated. As mentioned, the accounting staff were
able to trace the direct costs to the departments, and from our calculations above we have allocated the
indirect costs. Therefore, the total cost for each department is as follows.
DepartmentsIndirect cost
(allocated)Direct cost
(traced)Total
costsFinance $ 97 250 $ 52 750 $ 150 000
Personnel 78 500 41 500 120 000
Computer services 157 000 143 000 300 000
Home insurance 134 750 365 250 500 000
Car insurance 153 500 246 500 400 000
Life insurance 78 500 221 500 300 000
Total allocated $699 500 $ 1 070 500 $ 1 770 000The second stage of the allocation process is to allocate the service department costs to the oper-
ating departments. In this second stage allocation, the service department costs (being the indirect cost
pools) need to be allocated to the cost objects, which are the operating departments. The activity cost
drivers (allocation bases) chosen for allocation of the service department costs to the operating depart-
ments are: the number of invoices for the finance department; the number of employees for the per-
sonnel department; and the number of computers for the computer services department. The following
information details the total cost for each service department and the total usage of the cost drivers
selected to allocate service department costs.
Cost Cost driver
Finance
Personnel
Computer services
Home insurance
Car insurance
Life insurance$ 150 000
120 000
300 000
500 000
400 000
300 000Number of invoices
Number of employees
Number of computers5 000
100
60Total costs $ 1 770 000The cost driver usage by the three operating departments follows.Invoices Employees ComputersHome insurance
Car insurance
Life insurance1 500
2 000
1 50050
30
2025
25
10
Totals 5 000 100 60The above information highlights that each operating department requires the three service depart-
ments to provide services such as invoice processing, personnel services and information technology
support.
The steps involved in allocating the service department costs to the three operating departments are
outlined below.
Step 1: Overview of cost assignment — identifying cost objects, cost pools and cost drivers
Before commencing any calculations, it is important to understand the costing system that will be used
to determine the full cost for each operating department. The first step is identifying the relevant cost