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  • Service Allocation

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    Loreine Cyrille Lirio
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    The document discusses several methods for allocating support department costs: 1) Direct Methods allocate costs only to operating departments without considering interactions between support departments. 2) Step-down Methods allocate costs to other support departments and then to operating departments, partially recognizing mutual services between support departments. 3) Reciprocal Methods fully allocate costs among all support and operating departments, recognizing two-way interactions between support departments. This is the most precise but also the most complex method. 4) Direct Allocation Methods ignore reallocations between support departments and only allocate costs to operating departments.

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    SERVICE ALLOCATION

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    The document discusses several methods for allocating support department costs: 1) Direct Methods allocate costs only to operating departments without considering interactions between support departments. 2) Step-down Methods allocate costs to other support departments and then to operating departments, partially recognizing mutual services between support departments. 3) Reciprocal Methods fully allocate costs among all support and operating departments, recognizing two-way interactions between support departments. This is the most precise but also the most complex method. 4) Direct Allocation Methods ignore reallocations between support departments and only allocate costs to operating departments.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    5 views1 page

    Service Allocation

    Uploaded by

    Loreine Cyrille Lirio
    The document discusses several methods for allocating support department costs: 1) Direct Methods allocate costs only to operating departments without considering interactions between support departments. 2) Step-down Methods allocate costs to other support departments and then to operating departments, partially recognizing mutual services between support departments. 3) Reciprocal Methods fully allocate costs among all support and operating departments, recognizing two-way interactions between support departments. This is the most precise but also the most complex method. 4) Direct Allocation Methods ignore reallocations between support departments and only allocate costs to operating departments.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 1

    Direct Methods - Allocates support costs x = total overhead of service department 1

    only to Operating Departments y = total overhead of service department 2


    • No Interaction between Support
    Departments prior to allocation Specified Order of Closing - If this method
    (also known as the sequential or step
    Step-down Method - Allocates support costs allocation method) is used, the service
    to other support departments and to departments’ overheads are allocated to the
    operating production departments in a certain order.
    departments that partially recognizes the The service department that does the
    mutual services provided among all largest proportion of work for other service
    support departments departments is closed first; the service
    • One-Way Interaction between department that does the second largest
    Support Departments prior to proportion of work for other service
    allocation departments is closed second; and so on.
    Return charges are not made to service
    Reciprocal Method - Allocates support departments whose costs have previously
    department costs to Operating departments been allocated.
    by fully recognizing the mutual services
    provided among all support departments Direct Allocation Method - It ignores inter-
    • Full Two Way Interaction between service department service reallocations.
    Support Departments prior to Therefore, service department costs are
    allocation reallocated only to production departments.

    Choosing Between Methods


    • Reciprocal is the most precise ❖ Service departments may provide
    • Direct and Step-Down are simple to services for other service
    compute and understand departments as well as for production
    • Direct Method is widely used departments. For example, a
    personnel department provides
    Describe the key features of the services for other service
    reciprocal method: departments such as the power
    • The reciprocal allocation method generating plant, maintenance
    explicitly includes the mutual department and stores. The power
    services provided among all support generating department also provides
    departments. heat and light for other service
    • Interdepartmental relationships are departments, including the personnel
    fully incorporated into the support department and so on. When such
    department cost allocations. interactions occur, the allocation
    process can become complicated.
    Repeated Distribution (reciprocal) Difficulties arise because each
    Method service department begins to
    ❖ Service department cost are accumulate charges from other
    repeatedly allocated in the specified service departments from which it
    percentages until the figures receives services and these must be
    become too small to be significant. reallocated back to the user
    department. Once it has begun, this
    Simultaneous Equation Method – instead allocation and reallocation process
    of using the repeated (reciprocal) the same can continue for a long time before a
    allocations can be derived using this solution is found.
    method.

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