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An Examination of Support
Department Cost Allocations
a a
Timothy Cairney & Debra T. Sinclair
a
Georgia Southern University, Statesboro , GA ,
30460-8141 , USA
Published online: 04 Jan 2012.
To cite this article: Timothy Cairney & Debra T. Sinclair (2006) An Examination of
Support Department Cost Allocations, The Journal of Cost Analysis & Management,
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An Examination of Support Department Cost Allocations
Timothy Cairney1
Assistant Professor of Accounting, Georgia Southern University, Statesboro,
GA 30460-8141 • tcairney@georgiasouthern.edu • 912.486.7157
Debra T. Sinclair1
Assistant Professor of Accounting, Georgia Southern University, Statesboro,
GA 30460-8141 • dsinclair@georgiasouthern.edu • 912.681.0379
ABSTRACT
This study examines three factors that influence support cost allocations: the complexity
of the support service usage, the accounting system capability, and management beliefs
about the usefulness of allocations. Critics believe that any allocations are arbitrary and
cause incorrect decisions; however, allocations are integral to new cost systems such as
Resource Consumption Accounting (RCA) and Granzplankostenrechnung (GPK). We
find that support cost allocations are inadequately incorporated into most cost systems.
The reason is not that there is little cross-departmental use of services or that accounting
systems are inadequate. Rather, the belief of financial managers that the information is
useful is the main factor critical to firms’ use of support cost allocation systems. These
results have implications for systems implementation and education.
INTRODUCTION
The purpose of allocating support department costs is to charge users of the support
services with the cost of providing the services. Mechanical procedures for support cost
allocations (e.g., the Direct, Step-down, and Reciprocal methods) have long been a major
component of accountants’ training, with detailed descriptions in all of the major text-
books (e.g., Horngren et al., 2006, and prior editions). However, Keys and van der Merwe
(2001) report that these methods are inadequately incorporated into most cost systems.
Our evidence strongly supports this claim.
New cost theories such as Resource Consumption Accounting (RCA) and Granz-
plankostenrechnung (GPK) have explicitly integrated methods of support cost allocations
into their cost systems designs (Sharman, 2003; Webber and Clinton, 2004), and Kee and
Matherly (2003) explain how the methods can also be incorporated into Activity Based
Costing (ABC). Despite these advances in cost systems, many authors and practitioners
believe any allocation is detrimental to achieving company goals (e.g., Beckett, 1951 —
for an early example; through Thomas, 1969; to Corbett, 1998 — as a recent example).
Thus, the recent developments in cost systems design (e.g., ABC, RCA, and GPK) against
this background of criticism of cost allocations motivate this study’s examination of the
extent to which support cost allocations occur in practice.
Critics believe that allocations of support costs can result in poor decision-making
because cost allocations are often arbitrary. This criticism stems from using per-unit costs
for informing management decisions. For example, Soloway (1993) cites an example of
1
The authors thank Georgia Southern’s College of Business Administration for funding this research.
The Society of Cost Estimating and Analysis 37

Cairney and Sinclair
an aerospace and defense (A&D) contractor who tried to enter the commercial market.
Initially, the A&D contractor was able to penetrate the market. However, in response to
the new competitor, the commercial manufacturers quickly lowered prices and provided
faster delivery. The A&D contractor also lowered prices, but the A&D contractor’s cost
system indicated that it was unprofitable to remain in the market at these lower prices.
The contractor’s cost system had predicted that all overhead costs would be increased
incrementally by the “fully loaded burden rate” as the new cost allocation base increased,
so, the A&D contractor abandoned the commercial market. The A&D contractor’s cost
system gave an inaccurate picture of the true cost of shifting to the commercial market.
Corbett (1998) would use Soloway’s example to illustrate that, because these fixed
costs are allocated to production, the resulting per unit cost (determined by the accounting
system) is incorrectly interpreted by users as an incremental cost. Thus, production and
pricing decisions would assume that even fixed costs change proportionately with produc-
tion because the fixed cost portion is bundled in the per-unit cost. As a result, pricing or
production decisions in firms with excess capacity or constrained resources may incor-
rectly be based on the fully allocated cost instead of on the true marginal (flexible) cost.
However, allocating support costs does offer benefits unrelated to product costing and
pricing. Zimmerman (2006) views the allocation of support costs to user departments as
a means for cost control. This use of allocations for cost control at the cost-center level
is also fundamental to GPK and RCA (Friedl et al., 2005) and to ABC (Jones, 1998;
Schmidt, 1999). For example, support departments exist to support production processes
and, because the support departments are often not housed in the production departments,
the consumption of support services by user production departments may be considered
“free.” However, when managerial compensation is tied to cost center performance, the
allocations serve to remind users of the costs of services and, as a result, provide a re-
straint to unbridled growth of support departments. Users will seek to reduce total costs
in their departments by limiting the use of these services.
The benefits and drawbacks of support cost allocations can also be observed in prac-
tice. For instance, Noreen et al. (1995) cite examples of successful firms that do not
allocate support costs. One company (anonymously called “J Company”) uses only con-
tribution margin reports (without any support cost allocations) to manage the company.
Similarly, Narayannan and Donohue (1998) illustrate the drawbacks of cost allocations
in the Lehigh Steel case study.
Alternatively, Kaplan and Cooper (1998) cite many examples of firms that do allocate
support costs, such as Deere and Company. In a recent study, Folkeson and Brauner
(2005) also note that Deere and Company’s Supplier Relationship management program
evaluates the methods of support cost allocations used by its suppliers. Similarly, John-
son’s (1987) Wayerhaeuser case study describes a “charge-back” system of allocating the
support costs of the company’s Financial Services department. In an international analy-
sis, Krumwiede (2005) cites several large and successful German companies that allocate
support costs through their GPK-based systems. While these many examples offer some
evidence of the use of support cost allocations, the evidence in these field examples does
not suggest how extensive the use of support allocations is. For instance, Krumwiede’s
(2005) GPK sample is self-selected rather than random and examines only German firms.
Consequently, the present study uses a mail survey to U.S. firms to examine how exten-
sive is the use of support cost allocations in practice.
38 The Journal of Cost Analysis and Management • Fall 2006

The survey was sent to companies in the manufacturing and healthcare industries for
the following reasons. The Consortium for Advanced Management –International (CAM-
I) group provides detailed discussions of support cost allocations which are closely
followed by manufacturing firms (see http://cami.affiniscape.com). Further, the Cost Ac-
counting Standards Board (CASB) provides overhead allocation guidelines to companies
who contract with the U.S. government (http://www.whitehouse.gov/omb/procurement/
casb_ds-1.pdf; see also Alston et al., 1993, and OMB’s Circular A-122, attachment A, sec-
tion D); therefore, the extent of use of service department cost allocations is expected to
be high for manufacturers. We also include hospitals in the survey because hospital report
guidelines suggest that the use of cost allocations should also be high for the healthcare
industry. Surprisingly, our study’s results suggest that the use of support cost allocations is
not widespread. The survey responses also indicate that the use of support cost allocations
is not driven by company complexity or by accounting system sophistication as would be
expected. Rather, the support of financial managers is critical to firms’ use of support cost
allocation systems. These results have implications for government contractors and those
who manage the contracts.
RESEARCH QUESTIONS
Our survey (Appendix A) is not the first to study cost allocations by companies; how-
ever, there is little prior research about the allocation of support department costs. One
related study is the 2003 Survey of Management Accounting sponsored by the Institute of
Management Accountants (IMA) and Ernst & Young (Garg et al., 2003). This study is an
often-cited annual survey of approximately 2,000 IMA members (in 2003) about a broad
set of issues and provides some insight into the current practice of support department cost
allocations. The IMA-E&Y results indicate that, on average, managers believe “shared
services” cause large distortions in cost reports. This begs the question: Do these manag-
ers follow their beliefs and not allocate the costs of the shared (i.e., support) services in
their companies’ accounting systems? Consequently, our first question extends Garg et al.
(2003) by inquiring about the extent of support service allocation methods currently used
by sampled companies. After investigating the extent of support service allocations, we
turn to three possible influences on these allocations.
Gardner and Lammers (1988) survey large banks and savings and loans companies
about their cost systems. The authors conclude that firms in the banking industry employ
cost allocations and believe the information to be useful. The majority of their respon-
dents indicate that support costs are allocated to responsibility centers using service
department output measures (such as time spent by service professionals), so the charges
are linked to the users through the use of the support service rather than through an ar-
bitrary allocation. Consequently, the first influence we examine is whether the extent of
support department cost allocations is linked to the extent of use of those support services
in surveyed companies.
The second influence concerns the information system. It is commonly held that
advances in cost systems design (ABC, GPK, RCA) are a function of technology (e.g.,
Thomson and Gurowka, 2005). Tracking the interactions between the many resource,
service, and activity pools is more feasible because computer systems have made the ac-
counting for these complexities more cost-effective. If support services usage is complex,
then it is more likely that firms will employ an accounting system that is capable of reflect-

ing the underlying complexity of workflow. From the IMA-E&Y study, Garg et al. (2003)
report that firms intend to pursue more complex systems, ostensibly because companies
have implicated their current, simpler accounting systems in the distorted cost allocations.
We extend previous work by seeking information about whether firms’ current systems
are capable of capturing the support service complexities.
Finally, the third influence examined involves management commitment to accounting
allocation systems. Prior studies conclude that accounting systems reflect management
commitment and culture — more complex systems can exist if there is management sup-
port for these systems (Shields and Young, 1989; Cawsey et al., 1994). This is reflected in
examinations of RCA and ABC implementation (e.g., Thomson and Gurowka, 2005) and
in the survey results of Garg et al. (2003), which indicate that if executives and manage-
ment “buy into” accounting initiatives then it is more likely the initiatives will be adopted.
This study relates these IMA-E&Y survey results to firms’ current systems by inquiring
of management beliefs about the usefulness of information from the current support cost
allocation practices of sample firms.
In summary, we hypothesize three factors influencing the extent of support cost alloca-
tions and examine the following relationships:
The extent of Support complexity of support service usage,

= f
Cost Allocations system capability, manager commitment
SUBJECTS
The survey was administered by mail in the fall of 2004 to 95 manufacturing companies
and 70 healthcare firms selected from the ReferenceUSA database (ReferenceUSA,
2004). Two areas were examined: (1) to what extent are support department allocations
used and (2) what are the factors that might influence the use of support allocations? As
noted previously, we chose the manufacturing and healthcare industries because these are
economically large sectors in which we expected to find sophisticated levels of support
department cost allocations.
To be included in the sample, we required firms’ revenues to be more than $50 mil-
lion (to more likely examine firms with some level of complexity) and below $1 billion
(above this, firms are likely to be diversified away from the manufacturing/healthcare in-
dustries). Additionally, we required that the firm be located in Georgia. This requirement
is imposed mainly because of research funding limitations. Prior to mailing, the survey
was reviewed by an independent executive for relevance and clarity. Respondents were
assured of anonymity, although some returned contact information in order to receive
summary results.
The survey was mailed in September 2004 to the financial officers of the sample firms
and included a stamped return envelope and $1 for consideration. The first mailing re-
sulted in 30 completed surveys returned. A second request went out in October 2004 and
resulted in 15 “late” completed surveys for a net response of 45 (27%). Some reasons
for non-responses might be inferred from the comments on the 6 uncompleted surveys
returned. Some noted that they could not respond because of private company confidenti-
ality concerns and others noted they could not respond because of public company privacy
policies. Also, a comparison of late and early responses reveals that the late responses

tend to be from companies with less support department service usage. Of the original
165 sample firms, 48% have revenues between $50 and $100 million; however, only 31%
of the responses indicate sales at this level. Therefore, it appears that non-respondents are
smaller and are likely to have less support department service usage.
Table 1 presents the profile information of survey participants. Firms have, at the me-
dian, between $100 million and $500 million in revenues (despite initial restrictions on
sample size, seven firms indicate revenues less than $50 million.) — manufacturing firms
indicate a median between $100 million and $500 million and healthcare firms between
$100 million and $200 million. From Table 1, the median number of support departments
is six, with the manufacturing median at 5.5 and the healthcare median at 16.5. Although
the median number of support departments (6) is less than the median number of produc-
tion departments (17.5), the higher mean number of support departments (22.2) and the
deviation (45.2) indicates that the sample does include a healthy range of support depart-
ment activity. Excluding the single largest manufacturing firm (500 production and 250
support departments) reduces the mean number of production departments to 29 and the
mean number of support departments to 16 for the sample.
We also asked for the experience of the person completing the survey. Responses
indicate a median of 20 years accounting experience (a low of four years, with three ob-
servations reporting less than 10 years). Other responses (not tabulated) indicate that 20
(44%) participants are senior officers (Chief Financial Officers or Vice Presidents) and 25
(56%) are in accounting positions (Controller, Accounting Manager, Cost Accountant).
This profile suggests that the respondents have sufficient experience and knowledge so
that the completed surveys can be relied upon.
RESULTS
The Extent of Support Department Cost Allocations
The main question concerns the extent of support cost allocations. From Table 2, the re-
sponses indicate that the use of cost allocations is not universal. A large number of firms
do not allocate costs: 16 (35%) do not allocate support costs to production units (Q5)
Table 1. Summary profile information about survey participants.

Manufacturing Healthcare
Total responses firms firms
(n = 45) (n = 25) (n = 20)
Survey Question Standard
(Question Number) Mean Median Deviation Median Median
(Q1) How many years’
18.9 20 8.9 20 25
experience in accounting?
(Q2) What are firm revenues? $100 to $100 to N/Aa $100 to $100 to
$500M $500M $500M $200M
(Q3) Number of production
41.5 17.5 88.8 6 35
departments
(Q4) Number of support de-
22.2 6 45.2 5.5 16.5
partments
Not applicable because the survey requested ranges of revenues.
a

and 27 (60%) do not allocate support costs to other support departments (Q6). A detailed
industry-level breakdown reveals that 35% of the manufacturing firms do not allocate
support costs to production departments (Q5) and 78% of the manufacturing firms do
not allocate support costs to other support departments (Q6), compared to 36% (Q5) and
42% (Q6) for the healthcare firms. While the proportion of manufacturing and healthcare
industries that allocate support service costs to production departments appears to be the
same, manufacturing firms appear to be less likely to allocate the cost of support services
to other support departments.
We next form two categories from the responses to Q5 and Q6: “low” allocaters (25%
or below) and “high” allocaters (50% or above). From Table 2, 24 firms (16 plus 8 for
Q5), or 53%, allocate relatively low amounts of support costs to production departments
and 39 (86% for Q6) allocate relatively low amounts to other support departments. Thus,
in these industries where allocations of service costs are expected to be common, a large
portion of firms can be described as “low” allocaters.

Some firms may use a decision support system (e.g., an Excel spreadsheet) outside of
their formal accounting system to produce allocation-based information. From the survey,
nine firms indicate they use ad hoc analyses; of these, only three firms had indicated that
allocations are not done within the formal accounting system. Thus, it appears that a large
percent of the sampled firms allocate only a minimum proportion of their support costs.
Table 2 also includes three questions about the complexity of firms’ allocation proce-
dures. Of the firms that allocate, the vast majority use the direct method (Table 2, Q7),
which allocates costs directly to production departments and ignores the use by other
support departments. Of the 29 firms, 27 that indicate they allocate to some extent also
indicate they use the direct method to some extent (Q7), while only 11 use the sequential
method (Q8) and only five use the reciprocal method (Q9). So, despite the fact that ac-
countants learn more complicated (and more accurate) cost allocation methods as part of
Table 2. Responses to survey questions about the extent of support cost allocations
in participants’ accounting systems.
Survey Question 1 2 3 4 5
(Question Number) 0% 25% 50% 75% 100%
(Q5) What is the amount of your Support De-
partments’ costs that are allocated to production 16 8 6 4 11
departments through the accounting system?
(Q6) What is the amount of your Support
Departments’ costs that are allocated to other
27 12 4 1 1
Support departments through the accounting
system?
(Q7) What % of the total Support costs isallo-
cated only to production departments 18 6 4 6 11
(the DIRECT METHOD)?
(Q8) What % of the total Support costs isallo-
cated first to other Support departments 34 6 3 1 1
(the STEP METHOD)?
(Q9) What % of the total Support costs isallocat-
ed simultaneously to other Support departments 40 4 1 0 0
(the RECIPROCAL METHOD)?

their training, the simplest method is favored in practice. Manufacturing and healthcare
firms have similar responses.
We also inquired about what support department cost drivers the surveyed firms use.
The use of output activities to allocate costs is an essential difference between RCA and
ABC (Keys and van der Merwe, 1999). In their recent study, Garg et al. (2003) report
that direct labor is the main allocation base for their sample firms. In our survey, respon-
dents indicate that, of the firms that do some allocation, only 23% use activity-based cost
drivers (e.g., kilowatts, setups, hours of service), 46% use value-added bases (e.g., costs
accumulated to date), and 31% use simple, unit-level allocation bases (direct labor, units
of production). Thus, our results are consistent with the IMA-E&Y survey in that 77% of
the sample firms do not track service usage through logical output cost drivers.
Complexity of Service Department Usage

Next, we present results of whether support cost allocations by accounting systems re-
flect the use of the support service department services by other responsibility centers.
In other words, is there an association between the use of services and the accounting for
that use?
Table 3 presents a summary of responses to questions about support department activi-
ties. The table indicates that there is an extensive use of support department services by
manufacturing departments. Only two firms indicate that producing departments use little
or no service department outputs and only nine (20%) indicate little or no usage by other
support departments. It may be that the service departments were housed in manufactur-
ing centers, in which case allocations would not be required (support services would be
direct costs to the production department), however, only two firms indicate that support
services are dedicated within manufacturing departments. Therefore, we conclude that
there is extensive use of support services for our sample.
We next examine the association between the extent of use and the extent of alloca-
tions. Table 3 suggests extensive use of support services, but Table 2 suggests less than
extensive allocations. More formal nonparametric comparisons indicate only a weak
association between support cost allocations and support service use. In a first test, “allo-
caters” are defined as firms that indicate responses at 25% or more for either Q5 or Q6 in
Table 2 (i.e., with at least “a little” allocation via the accounting system); those indicating
zero in both are “nonallocaters”. We find allocaters’ median use of support services by
production departments (Q10, Table 3) to be greater than nonallocaters’ median use (Wil-
coxon Z = 1.92, p < 0.05), consistent with the expectation that greater usage of support
Table 3. Responses to survey questions about the extent of participants’ use of

support services by other departments.
(Question Number) None Little Medium Significant Extensive
(Q10)To what extent are the Support
Departments’ services used by the pro- 0 2 10 27 6
duction departments?
(Q11)To what extent are the Support
Departments’ services used by other 3 6 18 15 3
Support departments?

services is associated with a greater extent of allocations. However, we do not find that
significant inter-support service usage impacts accounting systems in that Q11 of Table
3 does not produce any significant differences (Wilcoxon Z = 1. 52). In a second formal
test, Spearman correlations are calculated to measure the association between production
usage (Q5, Table 2) and the allocation of support costs to production (Q10, Table 3); the
coefficient is 0.26 and marginally significant (p < 0.10). Similar Spearman correlations
are calculated for the usage by other support departments and the allocations to other
support departments (Q6, Table 2, and Q11, Table 3); the coefficient is 0.25 (p < 0.11)
and insignificant.
In summary, some support is found for the first hypothesized relationship, that greater
use of support services are associated with more extensive support cost allocations by the
accounting system. This conclusion is cautioned by the fact that the evidence appears to
be statistically marginal.
Capability of the Accounting System

We now examine whether the firm’s accounting system impacts the allocations per-
formed. One component of the accounting system is the experience of the financial
manager. Earlier, it was noted that respondents’ median number of years experience is 20
years, suggesting that the managers should understand how allocations work. We find no
statistical difference between the experience of allocaters and nonallocaters.
From Table 4, only 6 firms (7%) indicate that 25% or less of their Support service costs
are captured in separate accounts (Q12). This means that indirect costs are not lumped
together in a single ledger account so that the different support activities would be difficult
to identify and control.
Sample firms also indicated what accounting software they used. While many different
softwares are employed, all are sophisticated enough to be able to provide allocations. For
instance, according to the survey, ORACLE, PEOPLESOFT, and SAP are used by manu-
facturing firms that do not allocate as well as by firms that do allocate. Also, MEDITECH
and MCKESSON are systems used by both allocaters and nonallocaters in the health-
care sector. Although, statistical test are not applicable, we conclude that differences in
software are not evident across allocaters and nonallocaters. In summary, it appears that
systems capabilities (that is, financial manager capability, data capture ability, and system
sophistication) do not impact firms’ use of support cost allocations.
Table 4. Responses to survey questions about the sophistication of

participants’ basic accounting systems.
(Question Number) 0% 25% 50% 75% 100%
(Q12) What percent of support departments have sepa-
3 3 5 12 22
rate General Ledger accounts?
(Q13)a What percent of support services are housed
9 11 2 2 0
within production units?
a
This question was asked only of Manufacturing firms.

Manager Beliefs about the Usefulness of Allocations

Next, the commitment of financial managers to the use of allocations is examined. The
survey asked financial managers whether they believed allocations should be performed,
for what reason allocations should be performed, and to rank the reasons.
In Table 5, Q14 to Q17 represent negative reasons from those who do not believe al-
locations useful, and Q18 to Q20 are positive reasons from those who believe allocations
are useful (see Table 5 for the list of reasons). In no instance did anyone provide a positive
reason and a negative reason — managers are either wholly for or wholly against alloca-
tions. The row, Number of Responses, indicates the number of financial managers who
chose the indicated reason; many managers identified more than one reason so the sum
of the numbers (70) is greater than the total participants. Twenty-nine participants (64%)
chose at least one positive reason and 16 (36%) chose at least one negative reason. A Chi-
Square test of whether those indicating support for the use of allocations (Q18 to Q20)
also use allocations is highly significant with a Chi-Square of 7.03 (p < 0.001; Fisher’s
Exact significance is p < 0.02), providing strong evidence for the hypothesis.
Table 5 also indicates that of the three positive reasons to allocate, “product pricing”
and “departmental performance evaluation” are of high importance, and “cost control”
is much less important. Of the four reasons not to allocate, “poor decision making” and
“poor performance evaluations” are the main weaknesses identified.
From Table 5, it appears that financial managers have strong beliefs about the useful-
ness of support cost allocations. Further tests reveal that the proportion of costs allocated
using the more sophisticated step-down method is more prevalent among those managers
Table 5. Responses to survey questions about participants’ beliefs in the usefulness

of information from support cost allocations.
Question
Numbera Q14 Q15 Q16 Q17 Q18 Q19 Q20 Q21
Number of
5 2 7 7 19 12 15 3
responses
Rankb = 1 5 0 3 6 12 2 11 0
Rankb = 2 3 1 2 0 4 6 2 0
Rankb = 3 0 0 0 0 1 2 2 0
The questions in this table are based on:
a
Q14. Support cost allocations are not useful because support services are housed in production units.
Q15. Support cost allocations are not useful because support costs are immaterial.
Q16. Support cost allocations are not useful because support allocations result in poor decision-making.
Q17. Support cost allocations are not useful because support allocations result in poor production department
performance evaluation.
Q18. Support cost allocations are useful because support allocations enhance product pricing.
Q19. Support cost allocations are useful because support help control support department costs.
Q20. Support cost allocations are useful because support help in production department performance evaluation.
Q21. None of the above apply: please explain.
b
Respondents were asked to rank their beliefs (Q14-Q21) with a rank of 1 being most important and 3 being
least important.

who believe allocations are useful (Chi-Square = 4.13, p < 0.04; Fisher’s Exact signifi-
cance is p < 0.07). A test for the association between the use of the direct method and
those who believe allocations are useful is Chi-Square = 18.05 (p < 0.001). We also report
that the level of support service complexity (i.e., the number of production and service
departments, Q3 and Q4 in Table 1) does not differ between those who believe allocations
useful and those who do not (Wilcoxon Z = 0.30). Thus, the use of support department
cost allocations is strongly influenced by financial managers’ beliefs.
CONCLUSIONS
Evidence from large public companies may not reflect well the needs of a broader spec-
trum of companies, so this study surveyed medium sized firms. The participants were
drawn from the manufacturing and healthcare industries, and the results reveal that sup-
port department cost allocations are less than expected. This study documents the extent
to which manufacturing companies utilize support department cost allocations and sug-
gests that (1) practice needs to catch up to theory, and (2) education needs to improve its
delivery of support allocation subject matter. However, the limited sample size in this
study requires additional research on the extent and environment of support cost alloca-
tions.
The motivation for our study is derived from such recent studies as Keys and van der
Merwe (2001) who report that support cost allocation methods are inadequately incor-
porated into most cost systems. Our evidence strongly supports the claim of inadequate
support cost allocations; therefore, it is likely that additional training and exposure is
required before firms adopt such systems as GPK or RCA. We believe the benefits from
better allocation systems are significant. For instance, Baldwin et al. (2001) provide a
framework for justifying the “bundled purchase” of support services. Preliminary to this
justification would be to understand how much the support services cost and how much
support services are used within the organization.
However, we recognize that financial managers are exposed to the arguments for and
against support cost assignment (see any intermediate cost accounting text book), so the
survey responses may be a reflection of the theoretical discussion about the questionable
benefits of cost allocations (Corbett, 1998). For instance, some of the written comments
from the survey are interesting. One exclaimed that (s)he is a “firm believer that you must
assign cost where they have the best chance of being controlled!” Another exclaimed “al-
located costs are valueless” and referenced three books on the “Theory of Constraints.” In
summary, we hope future research will continue to examine support cost allocations.
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APPENDIX A

SUPPORT SERVICE COSTS SURVEY.

Part A. Information about your company/division. Please maintain your company or
divisional level frame of reference throughout the survey.
1. What is the position of the person completing this survey?
Other:
2. Please describe your location: Single Please
Branch Subsidiary Headquarters Location describe
|________|__________|__________|_________|
3. How many years experience have you had

in the accounting field?
4. Would you describe your accounting Mostly Managerial About Managerial Mostly
background as more cost/managerial Managerial > the < Financial
(internal) or more financial (external)? Financial Same Financial
|___________|__________|__________|___________|
5. What is the annual Revenues of your company? <$50 51-75 76-100 101-500 501-$1B >$1B
(in MILLIONS) |______|______|________|________|_______|
6. What is the approximate number of

Production departments in your division/company?
7. What is the approximate number of

Support service departments in your division/company?
8. What software is used for your company’s accounting?
Part B. Information about Production and Support service departments in your company.
PLEASE INDICATE THE BEST DESCRIPTION AMONG THE CHOICES. FEEL FREE TO MAKE
COMMENTS AS YOU PROCEED THROUGH THE SURVEY.
9. To what extent are the Support service None Little Moderate Significant Extensive
departments’ outputs used by the |________|_______|_________|__________|
Production departments?
10. To what extent are the Support

departments’ outputs used by other None Little Moderate Significant Extensive
Support departments? |______|_______|__________|__________|
(i.e. interservice department usage)
11. Over recent years, how has the size of the Large Moderate No Moderate Large
Support departments changed Decrease Decrease Change Increase Increase
relative to the Production departments? |________|_________|_________|________|
12. What percent of Support services are 0% 25% 50% 75% 100%
housed within Production departments? |________|_______|_________|__________|
Part C. Information about your accounting system.

PLEASE INDICATE THE BEST DESCRIPTION. FEEL FREE TO MAKE COMMENTS.
13. What is the percent of your Support department
costs that are recorded in their own separate 0% 25% 50% 75% 100%
ledger accounts? |________|_______|_________|__________|

14. What is the percent of your Support

Departments’ costs allocated to Production 0% 25% 50% 75% 100%
departments through the accounting system? |________|_______|_________|__________|
15a. Do you think your company should allocate � No: Support services are housed in production
Support service department costs? � No: Support department costs are immaterial
(check appropriate box(es)) � No: Support allocations result in poor
Production department performance evaluation
� No: Support allocations result in poor
Decision-Making
� Yes: Support allocations enhance product pricing
� Yes: Support allocations help control Support
department costs
� Yes: Support department allocations help in

Production department performance evaluation
� Other: please explain.
b. Please place a number beside each checked
box in question 15a (above, right) to indicate
their rank (1=most important).
16. What % of your Support departments’ 0% 25% 50% 75% 100%

costs are allocated to other service |________|_______|_________|__________|
departments through your accounting system?
17. Please describe the Support service department � Service costs are not allocated
allocation bases (drivers). � % of Sales
� % of Total Costs
� Distributed evenly among user departments
� Based on actual usage – please explain basis
� Other – please describe
18. Is there an effort to estimate the allocations � No, Service department costs are not allocated
of Support service department costs to other � No, our accounting system regularly allocates
Support service departments outside your Support costs
accounting system? � Yes, some Support cost allocations are estimated
for ad hoc analyses
� Yes, extensive ad hoc analyses are performed
19. What % of the total Support costs is 0% 25% 50% 75% 100%
allocated only to Production departments |________|_______|_________|__________|
(the DIRECT METHOD)?
allocated first to other Support departments |________|_______|_________|__________|
(the STEP/SEQUENTIAL METHOD)?
21. How do you determine the order of the � ordered by dollar value, largest dollar first
Support departments’ allocation (which � ordered by usage, largest provider first
is first, which is second, etc.)? � ordered by importance, most important first
� other: please explain.
2
allocated simultaneously to the other Service |________|_______|_________|__________|
departments (the RECIPROCAL METHOD)?
23. Do you separate Support service costs into � Yes

Fixed Costs and Variable Costs for purposes � No
of allocation? � Other: please describe.
24. What level of estimate is used to allocate � Not done

the Fixed portion of Support department � Current year budgeted base (driver) volumes
costs? � Normal (long run) base (driver) volumes
� Best practices or ideal base (driver) volumes
� Other (please describe):
25. How often do you review the Service department Every Every
allocation system? At least 2-5 5 years When Never
Annually Years or so Needed Reviewed
|__________|_______|_______|_________|
26. How often do you update the Service department Every Every
base rates? At least 2-5 5 years When Never
Annually Years or so Needed Reviewed
|__________|_______|_________|_________|
27. To what extent do departmental managers � Understand and agree with system
understand and support the service cost � Understand, but disagree with system
allocation system? � Don’t understand, but agree with system
� Don’t understand, but disagree with system
28. For what reasons do you allocate Support � Product costing

service department costs to user departments? � Control of support department costs
� Production department performance evaluation
� Evaluate service department usage
� Other: please explain

Part D. SURVEY CLOSE.

Comments.
Among the comments you may have, could you please describe how Support service
department capacity is controlled in your organization; especially if you do not allocate
Support service costs.
Please feel free to write any comments or suggestions below. Include, if you want, your
comments on the coverage of support cost allocations in accounting classes.
Would you like summary results of this survey? _______ YES

_______ NO
If so, please feel free to separately email the surveyor at:

tcairney@georgiasouthern.edu (this will keep your responses independent of any
identification of your company)
or write in your address below:
May I contact you for follow-up questions? _______ YES

_______ NO
Thank you for your time!

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The Society of Cost Estimating and Analysis 37

38 The Journal of Cost Analysis and Management • Fall 2006

The Society of Cost Estimating and Analysis 39

The extent of Support complexity of support service usage,

40 The Journal of Cost Analysis and Management • Fall 2006

Table 1. Summary proﬁle information about survey participants.

The Society of Cost Estimating and Analysis 41

portion of ﬁrms can be described as “low” allocaters.

42 The Journal of Cost Analysis and Management • Fall 2006

Complexity of Service Department Usage

Table 3. Responses to survey questions about the extent of participants’ use of

The Society of Cost Estimating and Analysis 43

Capability of the Accounting System

Table 4. Responses to survey questions about the sophistication of

44 The Journal of Cost Analysis and Management • Fall 2006

Manager Beliefs about the Usefulness of Allocations

Table 5. Responses to survey questions about participants’ beliefs in the usefulness

The Society of Cost Estimating and Analysis 45

46 The Journal of Cost Analysis and Management • Fall 2006

The Society of Cost Estimating and Analysis 47

ReferenceUSA database, accessed June 29, 2004, from http://www.referenceusa.com.

48 The Journal of Cost Analysis and Management • Fall 2006

The Society of Cost Estimating and Analysis 49

SUPPORT SERVICE COSTS SURVEY.

3. How many years experience have you had

6. What is the approximate number of

7. What is the approximate number of

8. What software is used for your company’s accounting?

10. To what extent are the Support

Part C. Information about your accounting system.

50 The Journal of Cost Analysis and Management • Fall 2006

14. What is the percent of your Support

� Yes: Support department allocations help in

16. What % of your Support departments’ 0% 25% 50% 75% 100%

23. Do you separate Support service costs into � Yes

24. What level of estimate is used to allocate � Not done

28. For what reasons do you allocate Support � Product costing

52 The Journal of Cost Analysis and Management • Fall 2006

Part D. SURVEY CLOSE.

Would you like summary results of this survey? _______ YES

If so, please feel free to separately email the surveyor at:

or write in your address below:

May I contact you for follow-up questions? _______ YES

The Society of Cost Estimating and Analysis 53

54 The Journal of Cost Analysis and Management • Fall 2006

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