Required information

Learning Objective $22-$P$2$: Allocate indirect expenses to departments.

Skip to question

When computing departmental income, we make two decisions for allocating expenses.

How to allocate indirect expenses such as rent and utilities, which benefit several departments.

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.

Direct and Indirect Expenses