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Support Department Cost Allocation Method

The document discusses three methods for allocating costs among support departments in a company: direct, sequential, and reciprocal. The direct method ignores interactions between support departments, while the sequential method recognizes some interactions by allocating costs in steps. The reciprocal method is most accurate as it recognizes all interactions by using simultaneous equations to allocate costs between all support departments. Companies must consider the extent of interactions and costs/benefits of each method to determine the best approach.

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171 views2 pages

Support Department Cost Allocation Method

The document discusses three methods for allocating costs among support departments in a company: direct, sequential, and reciprocal. The direct method ignores interactions between support departments, while the sequential method recognizes some interactions by allocating costs in steps. The reciprocal method is most accurate as it recognizes all interactions by using simultaneous equations to allocate costs between all support departments. Companies must consider the extent of interactions and costs/benefits of each method to determine the best approach.

Uploaded by

sheikh5
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Support Department Cost Allocation Method

Many companies have multiple support departments, and they frequently interact. These
interactions among support departments need to be considered to produce accurate cost
assignments.
Three methods can be used to allocate support department costs: the direct, sequential, and
reciprocal methods. In determining which support department cost allocation method to use,
companies must:
 Determine the extent of support department interaction.
 Weigh the costs and benefits associated with each method.
1. Direct Method of Allocation
The first method, the direct method, is the simplest of the three. The direct method
allocates costs of each of the service departments to each operating department based
on each department’s share of the allocation base. Services used by other service
departments are ignored.
When support department costs are allocated only to the producing departments, the
direct method of allocation is being used. This is the most simple and straightforward
of the three allocation methods. Under this method,
 No support department costs are allocated to any other support department.
 All interactions between the support departments are ignored.
2. Sequential Method of Allocation
The second method of allocating service department costs is the step method. This
method allocates service costs to the operating departments and other service
departments in a sequential process. The sequence of allocation generally starts with
the service department that has incurred the greatest costs. After this department’s costs
have been allocated, the service department with the next
highest costs has its costs allocated, and so forth until the service department with the
lowest costs has had its costs allocated. Costs are not allocated back to a department
that has already had all of its costs allocated.
The sequential (or step) method of allocation recognizes that interactions among sup-
port departments do occur.
1. Cost allocations are performed in a step-down fashion.
a. The costs of the support department rendering the greatest service are allocated
first.
b. Once a support department’s costs have been allocated, no costs are allocated
back to it.
c. The costs allocated from a support department are its direct costs plus any costs
it receives in allocations from other support departments.
2. Sequential allocation may be more accurate than the direct method because it
recognizes some interactions among the support departments.
Its disadvantage, however, is that it does not recognize all of the interactions between
support departments.
3. Reciprocal Method of Allocation
The third method is the most complicated but also the most accurate. The reciprocal
method allocates services department costs to operating departments and other service
departments. Under the reciprocal cost, the relationship between service departments
is recognized and cost is allocated to and from each service department for services
provided.
In the reciprocal method of allocation, all of the interactions between support
departments are recognized by its reciprocity on cost allocation.
1. The total cost of a support department is the sum of its direct costs plus the propor-
tion of service received from other support departments. The total cost reflects
interactions among the support departments.
Total cost = Direct costs + Allocated costs
2. A series of simultaneous linear equations must be constructed and solved to perform
reciprocal cost allocation.

Comparison of the Three Methods


 The advantages of better allocation must outweigh the increased cost of using a more
theoretically preferred method.
 Rapid changes in technology make allocation unnecessary. For example, there is no need
for support department cost allocation in the JIT environment because the manufacturing

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