Allocation of

Support Department Costs,

Common Costs,
and Revenues

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Allocating Costs of a Supporting
Department to Operating Departments
Supporting (Service) Department – provides the
services that assist other internal departments in the
company
Operating (Production) Department – directly adds
value to a product or service

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Methods of Allocating Support Costs to
Production Departments

1. Direct
2. Step-Down
3. Reciprocal

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Direct Method
Allocates support costs only to Operating
Departments
No Interaction between Support Departments prior
to allocation

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Direct Method
Support Departments Production Departments

Information Systems

Manufacturing

Packaging

Accounting

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Data Used in Cost Allocation
Illustrations

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Direct Allocation Method Illustrated

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Direct Allocation Method
Illustrated, cont.

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Step-Down Method
Allocates support costs to other support departments
and to operating departments that partially
recognizes the mutual services provided among all
support departments
One-Way Interaction between Support Departments
prior to allocation

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Step-Down Method
Support Departments Production Departments

Information Systems

Manufacturing

Packaging

Accounting

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Step-Down Allocation Method
Illustrated

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Step-Down Allocation Method
Illustrated, cont.

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Reciprocal Method
Allocates support department costs to operating
departments by fully recognizing the mutual services
provided among all support departments
Full Two-Way Interaction between Support
Departments prior to allocation

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Reciprocal Method
Support Departments Production Departments

Information Systems

Manufacturing

Packaging

Accounting

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Reciprocal Allocation Method
(Repeated Iterations) Illustrated

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Reciprocal Allocation Method
(Linear Equations) Illustrated

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Choosing Between Methods
Reciprocal is the most precise
Direct and Step-Down are simple to compute and
understand
Direct Method is widely used

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