Definition of Service Department
A service department is usually associated with a manufacturer’s production departments. However, a service department does not produce any of the factory’s output. Instead, it provides services to the production departments.
Each service department is responsible for its costs. Hence, the service departments are separate cost centers. The costs incurred by the service departments are considered to be indirect manufacturing costs that ultimately must get allocated to the goods produced.
Examples of Service Departments
Common examples of service departments include:
- Factory maintenance department
- Production quality control
- Factory information technology department
- Factory cafeteria
- Purchasing department
The various methods (direct, step, reciprocal) for allocating service departments’ costs are discussed in cost accounting textbooks.
