Reciprocal Method of Cost Allocation-Service Department Costing:
Definition:
Reciprocal method is a method of allocating service department
costs to other departments that gives full recognition to interdepartmental services.
Explanation:
The reciprocal method gives full recognition
to interdepartmental services. Under the step method, only partial
recognition of interdepartmental services is possible. The step method
always allocates costs forward never backward. The reciprocal method, by
contrast, allocates service department costs in both directions. The
reciprocal allocation requires the use of simultaneous equations. This
method is also known as algebraic method and simultaneous
equations method.
Under this method the true cost of the
service departments are computed first with the help of simultaneous
equations and these are then distributed to producing departments on the
basis of given percentage or ratio. Remember that true cost of the service
department means the cost of the service department which includes original
cost of the department plus the share of the other service department. The
main advantage of this method is to have an accurate distribution in a
single step in the distribution summary.
Example:
A company has two service and two producing
departments. The two service departments serve not only to producing
departments but also to each other. The departmental estimates for the next
year are as follows.
Producing
departments:
A
BService departments:
X
Y |
50,000
40,000
10,000
8,800
|
| The
service departments costs are to be distributed as under:
Cost of X : 50% to A, 40% to B, and 10% to Y
Cost of Y : 40% to A, 40% to B, and 20% to X |
|
Required:
Transfer the service departments costs to each other and to producing
departments. |
|
Solution:
Now we solve the given illustration first using the simultaneous
equation method as follows:
Original costs of service departments:
X = Rs.10,000
Y = Rs. 8,800
After getting the share from distribution of service
departments:
X = Rs. 10,000 + 20% Y
Y = Rs. 8,800 + 10% X
By putting the value of Y in equation (1)
X = Rs. 10,000 + 20%(Rs.8,800 + 10%X)
X = Rs. 10,000 + 1760 + 0.2X
X – 0.02X = Rs. 10,000 + Rs.1,760
0.98X = Rs. 11,760
X = 11760 / 0.98
= Rs. 12,000
By putting the value of X in equation (2)
Y = Rs. 8,800 + 10%(Rs. 12000)
Y = Rs. 8,800 + Rs. Rs. 1,200
= Rs. 10,000 |
|
Distribution Summary
|
|
Department |
Producing |
Service |
|
Original costs
Distribution of service department costs:
X
Y
Total departmental overheads |
A
Rs
50,0006,000
4,000
-------
60,000
===== |
B
Rs
40,0004,800
4,000
------
48,800
===== |
X
Rs
10,000(12,000)
2,000
-------
Nil
===== |
Y
Rs
8,8001,200
(10,000)
-------
Nil
===== |
Use of Reciprocal Method:
This method is rarely used in practice for
two reasons. First, the computations are relatively complex. Although the
complexity issue could be overcome by use of computers, there is no evidence
that computers have made the reciprocal method more popular. Second, the
step method usually provides results that are a reasonable approximation of
the results that the reciprocal method would provide. Thus, companies have
little motivation to use the more complex reciprocal method. |
