Service departments are organized to provide some needed service in a single, centralized place, rather than having all units within the organization provide the service for themselves. Service department costs are charged to operating departments by an allocation process. In turn, the operating departments include the allocated costs in their budgets, from which overhead rates are computed for purposes of costing products or services.

Variable and fixed service department costs should be allocated separately. The variable costs should be allocated according to whatever activity causes their incurrence. The fixed costs should be allocated in predetermined lump-sum amounts according to either the peak-period or the longrun average servicing needs of the consuming departments. Budgeted costs, rather than actual costs, should always be allocated. If actual costs were allocated, the operating departments would be implicitly held responsible for any inefficiency in the service departments. Any variances between budgeted and actual service department costs should be kept within the service departments and should be the responsibility of the service department managers.

Learning Objectives

Classify changes in noncash balance sheet accounts as sources or uses of cash.

Classify transactions as operating, investing, or financing activities.

Prepare a statement of cash flows using the indirect method to determine the net cash provided by operating activities.

(Appendix 15A) Use the direct method to determine the net cash provided by operating activities.