Internal support department cost allocation

Case Company „DIMAG“

Assignment 2. Internal support department cost allocation
Edwin has successfully completed the first steps in setting up a cost accounting system at
DIMAG Hungary. Conversion of expense entries from financial accounting into cost items for
cost accounting purposes is something he can manage by now. But here is already the next
problem.
DIMAG Hungary is a comparatively small plant only. Most resources (including manpower) go
into the core processes of manufacturing, logistics, and sales. The site does have some general
administration functions, but quite a few administrative tasks are simply done by DIMAG
headquarter in Germany. DIMAG Hungary, though, does have two own internal support
departments:
• A small team of IT experts takes care of the IT infrastructure (hardware and software),
liaise with DIMAG headquarters, and provide first level support to all DIMAG Hungary
staff and functions.
• Edwin has also set up a “process management team” (consisting of 2 persons only)
that acts as internal consultants for all issues on continuous process improvement.
When taking over his function, Edwin very soon noticed that many processes at DIMAG
Hungary were uncoordinated, not standardized and did not follow any clear guideline.
The process management team was set up to help resolve these problems.
Although being small, these two teams pose a challenge to Edwin when setting up a cost
accounting system. He remembers from his time at university, that these functions should be
treated as “internal support departments”, because they provide their services and output to
other teams and departments within the company – and not to the products themselves. Edwin
has collected information on both departments:
Absolute cost figures might be relatively small, but Edwin still wants to treat these costs in a
correct way – meaning that support department costs should be allocated following a causeand-
effect logic, while still keeping the necessary cost accounting effort low. Edwin is confident
that he will find a reasonable solution. He will try out different cost allocation methods and
determine monetary differences between the respective results. He can then assess whether
primary overhead
cost
cost driver
quantity
Manufacturing
Line 1
Manufacturing
Line 2
Warehouse &
Logistics
Quality Administration
and Sales
IT Process Mgmt.
IT 75.637,54 € 805 h 198 183 69 99 190 0 66
Process Mgmt. 31.501,62 € 578 h 122 105 36 33 210 72 0
output delivered to:
Seite 2 von 2
the choice of method matters at all and if so, which method would be the most appropriate for
DIMAG Hungary to use in the future. Time to get to work!
Task Description:
Take the role of Edwin Esbeler and perform the cost allocation for the internal support
departments of DIMAG Hungary:
1. Use all four different methods you have been familiarized with and calculate cost
allocation rates for the two support departments.
2. Determine the amount of secondary overhead cost for all operating departments. How
big (or small) are the differences between the four methods?
3. Interpret your results: What can be learned from the calculated allocation rates? How
should Edwin deal with these results?