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What are the three approaches or methods that are used to allocate the costs of service departments to other common departments or cost:
What are the 4 approaches or methods that are used to allocate the costs of service departments to other common departments or cost
1-The direct method
The direct method is the simplest and most common but least accurate of the methods. All service department costs are allocated directly to production departments. It ignores any service rendered by one service department to another, i.e., no attempt is made to allocate the costs of service departments to other service departments. Thus, no allocation is made of the cost of services rendered to other service departments.
2-The step-down method
The step-down method is a sequential process. It is slightly more involved than the direct method but is more accurate. The service departments are allocated in order, from the one that provides the most service to other service departments down to the one that provides the least. As each allocation is performed, the costs of the services departments are allocated to both the remaining service departments and the production departments. This method allocates service department costs to other service departments in addition to the producing departments,· i.e. it allows for partial recognition of services rendered by a service departments to another.
Step-down method steps:
Begin Allocation:
• With the service department that provides the highest percentage of its total services to other service
departments, or
• With the service department providing services to the greatest number of other service departments, or
• With the service department having the greatest dollar cost of services provided to other service departments.
2) The costs of the remaining service departments are then allocated in the same manner.
3) No cost is assigned back to service departments whose costs have already been allocated.
4) The process continues until all service department costs are allocated.
3-The reciprocal method
a. Theoretically, this method is the most appropriate for allocating service department costs.
b. It allows reflection of all reciprocal services among service departments.
c. Simultaneous equations are used to compute the completed reciprocated cost.
The reciprocal method is by far the most complex and most accurate of the three methods.
, Simultaneous equations are used to allocate each service department's costs among all other service
departments and production departments.
