Service department definition

Being proactive in developing the roles and tasks of the customer service department, means companies have a better chance of satisfied customers, which in turn means a more successful business overall. There are various methods for allocating service department costs to operating departments. However, the three commonly used methods are direct method, step down method and reciprocal method. The costs incurred by the service departments are considered to be indirect manufacturing costs that ultimately must get allocated to the goods produced. If the charges of service departments are assigned to the production area, these cost allocations will probably be included in a cost pool, and then allocated to goods produced. This means that some service department allocations may not be charged to expense until several months later, when the related goods are sold and charged to the cost of goods sold account.

The costs of service departments are allocated to the operating departments because they exist to support the operating departments. Examples of service departments are maintenance, administration, cafeterias, laundries, and receiving. Service departments aid multiple production departments at the same time, and accountants must allocate and account for all of these costs.

Allocation of service department costs to operating departments

The departments are categorized as either operating departments or service departments. The operating departments carry out the central purposes of the organization. This central purpose is the transformation of raw materials or assembling the parts into finished goods in a manufacturing organization and the provision of services to clients in a service organization. Throughout this text, we have emphasized cost allocations only in the operating departments of a company.

In addition to in-person customer service, there are other ways to handle customer service issues. The large business organizations usually have both types of departments. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. In the wake of the COVID-19 pandemic and escalating tensions with China, American companies are actively seeking alternatives to mitigate their supply chain risks and reduce dependence on Chinese manufacturing. Nearshoring, the process of relocating operations closer to home, has emerged as an explosive opportunity for American and Mexican companies to collaborate like never before.

Definition of Service Department

The services provided by a service department are then allocated to the other departments of a business that use these services. Managers often suggest that the allocation base should also reflect the benefit that each department receives from a particular service department. For example, the space occupied by each department may be used as the basis for allocating janitorial services to them. For instance, if you own a car dealership, it is appropriate to follow-up with customers at regular intervals to ensure they return to purchase another car and recommend your business to their friends. On the flip side, if you own a fruit stand, you will likely not contact customers away from your stand, nor will the customer spend thousands of dollars at one time. They may return for fruit, if you have high quality products and they have a pleasant experience, but you won’t need a customer service division to ensure customers return long-term.

It is crucial that these service department costs be allocated to the operating departments so that the costs of conducting business in the operating departments are clearly and accurately reflected. Many companies require support activities as well as core activities to produce their goods and/or services. Support services, or a service department, do not contribute directly to the production of goods or the providing of services, but they are necessary for the company to operate.

What is a service department?

In addition, consider service departments, support services, or administrative services support activities. In most organizations the costs incurred by service departments are allocated to operating departments using an appropriate allocation base. The allocation base selected for allocating the cost of a particular service department should drive the cost of that department. An increase or decrease in the total cost incurred by a service department should be directly proportional to the increase or decrease in the allocation base. Establishing customer service roles in the customer service department requires planning and organization. The type of business and the expectations of the customers must be considered.

• Examples of bases used to allocate service department costs are number of employees, machine-hours, direct labor-hours, square footage, and electricity usage.
• Setting up a customer service department requires thought and planning to ensure the goals of the company are met, and customers receive exceptional service.
• In addition to in-person customer service, there are other ways to handle customer service issues.
• Being proactive in developing the roles and tasks of the customer service department, means companies have a better chance of satisfied customers, which in turn means a more successful business overall.

Setting up a customer service department requires thought and planning to ensure the goals of the company are met, and customers receive exceptional service. Identifying the roles and tasks in the department helps to strengthen the company’s brand, build loyalty, and ensure all customer issues are appropriately handled. The various methods (direct, step, reciprocal) for allocating service departments’ costs are discussed in cost accounting textbooks. The service departments, on the other hand, do not directly engage in manufacturing goods or providing services to clients; rather, they provide services to operating departments of the same organization. They are established with the objective to serve and facilitate the operating departments of the organization in performing their functions smoothly and efficiently.

Customer Service Department: Role & Tasks

If your business offers products at a lower price point, the follow-up to customer purchases may be less formal and not as expected than if you offer large-ticket items. When the companies’ managers choose bases to use, they consider such criteria as the types of services provided, the benefits received, and the fairness of the allocation method. Examples of bases used to allocate service department costs are number of employees, machine-hours, direct labor-hours, square footage, and electricity usage. Selecting the right organization and the best ways to deliver customer service is critical to customer satisfaction. Understanding the various roles within customer service is important for planning and selecting those that fit your organizational goals. Once those positions have been determined, consideration must be given to telephone and online customer service as well.

These operating departments perform the primary purpose of the company—to produce goods and services for consumers. Examples of operating departments are the assembly departments of manufacturing firms and the departments in hotels that take and confirm reservations. There is a moderate trend favoring the outsourcing of service departments, on the grounds that outside suppliers keep tighter control over their costs, and so will charge less than an in-house department. Outsourcing of this type should be adopted with care, to ensure that only non-critical service functions are shifted out of a business. A service department is a cost center that provides services to the rest of a company. The manager of a service department is responsible for keeping costs down, or meeting the costs stated in a budget.