# Solutions to the reciprocal service cost allocation problem.

by David Ashton

Publisher: University of Warwick, Centre forIndustrial, Economic and Business Research in Coventry

Written in English

## Edition Notes

 ID Numbers Series Warwick research in industrial and business studies -- 42 Open Library OL13923817M

Wondering if anyone has developed a cost allocation model and might be able to provide some guidance on the approach. Attached is a file with a sample of the data and driver information. I have loaded the Data into the data model and added the SWITCH formula (field is "SMT")for reference. A type of cost allocation method in which, when a factory has more than one service department, these departments render services to each other and as well to the production department. In other words when in a given period, a service department receives a service from other service departments then the department receiving the service should be charged. Using the reciprocal method spreadsheet (shown in Exhibit ), show the costs allocated to production for Steamco Corporation. Use the data in Problem Service Department Allocation Sequential Method Support Departments Producing Departments Power Direct Costs Power Maintenance Total \$, (,) --\$ 0 ===== Maint. \$, 50, (,) \$ 0 ===== Grinding \$, , , \$, ===== Assembly \$ 60, 50, , \$, ===== PPT 7 Reciprocal Method. The.

Step-Down Method. Some organizations use the step-down method, also called the sequential or repeated allocation method. Which allocates services-department costs to other services departments and to production departments in a sequential manner that partially recognizes the mutual services provided among all service depts. (Reciprocal pportionment). The variable cost allocation treats all variable costs as part of the cost of goods sold while fixed costs are part of the operating expenses. The reciprocal method is noted as more complex than. Reciprocal method is used for overhead cost allocation from service department to the manufacturing department. This method is parallel to the step cost method and direct method. Although our focus in this chapter is on allocating the costs of service departments to production departments, we also discuss how the allocation process can help managers make decisions about keeping or eliminating the service departments. We return to this issue at the end of our discussion on service department cost allocation.

In computing these costs, Birch is considering three different methods of allocating overhead costs-the direct method, the step method, and the reciprocal method. Birch assembled the following data on overhead from its two service departments, the Information Systems . Consider the following information attributed to the material management department Budgeted usage of materials-handling labor-hours Budgeted cost pools: Fixed costs \$, Variable costs \$, ( hours x \$36 per hour) The company uses the single-rate method to allocate support costs to the Machining and Assembly Departments. Reciprocal Cost New Method (2) Constructing the Matrix IMA Hands-on: Simpler than ABC SIMPLER THAN ABC New Ideas for Using Microsoft Excel for Allocating Costs Reciprocal Costing OUTLINE The purpose of the presentation is to introduce a new method of solving an old problem The old problem is service cost allocation using reciprocal costing. Allocating service department costs based on budgeted rates rather than actual rates. a. eliminates the problem created when one user department’s consumption of a service affects another department’s service cost allocation. b. avoids allocating a service department’s idle capacity costs to users. c. allows an idle capacity variance.

## Solutions to the reciprocal service cost allocation problem. by David Ashton Download PDF EPUB FB2

Bundle: Cornerstones of Cost Accounting + Experiencing Accounting Video Series Printed Access Card (1st Edition) Edit edition. Problem 5CE from Chapter 7: RECIPROCAL METHOD OF SUPPORT DEPARTMENT COST ALLOCATIONRefer Get solutions.

Cost Allocation: Reciprocal Method. Refer to the data for University Printers in Exercise Required. Allocate the service department costs using the reciprocal method.

(Matrix algebra Solutions to the reciprocal service cost allocation problem. book not required because there are only two service departments.).

Service department cost allocation Reciprocal allocation Reciprocal Equations: S1 = ,+ *.S2 + 0*S3 + 0*P1 + 0*P2 + 0*P3 Solution to Problem 19 Service department cost allocation Percentages to Be Allocated to Departments Service Dept S 1 S 2 S 3 S 4 P 1 P 2 P 3 P 4. The two service departments provide service not only to two producing departments but also one another.

The costs of four departments and relationship among them is shown below: Required: Allocate the cost of service departments to producing departments using reciprocal/algebraic method. Solution. Let: Y = \$7, + Z —— Eq The validity of the linear algebra model to solve the reciprocal service department cost allocation problem has been widely recognized since Kaplan’s seminal paper in The Ac- counting Review in.

Total maintenance cost can be calculated as \$8, department cost + \$1, (7, x 20%) allocated from administration for a total of \$9, Step 3: Show cost allocations.

Now that you have the TOTAL Cost of Maintenance and Personnel, it is time to allocate it using the Total Cost amounts from Step 2 and the percents from Step 1.

Reciprocal Allocation Method 1. HOW TO USE THE RECIPROCAL ALLOCATION METHOD By Paulino Silva 2. Introduction: As part of management accounting, the use of departmental cost allocation method for assigning indirect costs, despite its old origins, it is still widely used today.

The power of reciprocal method over other methods (direct method, step-down method) lies in its considering the mutual services provided among all service departments which means the costs of service departments are allocated to each service department (except the service provider) besides operating departments.

Solution: Direct, Step, Reciprocal method. Cost allocations may have unexcpected side effects common problems and solutions are: Useres overuse/underuse service because per use allocation is to low/high Under the direct method of service department cost allocation, all service department costs are allocated directly to the production.

It is known that one can view the cost allocation problem as an absorbing Markov process, with the production departments as the absorbing states and the service departments as the transient states. 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. 1 Answer to Cost Allocation: Reciprocal Method, Two Service Departments During the past month, the following costs were incurred in the three production departments and two service departments of Postaic Company: Using Department Supplying Factory Department Administration Support Fabrication Assembly Finishing.

Cost Accounting Problem (Reciprocal Method & Iterations).mp4 Cost Allocation Reciprocal Method Example Reciprocal Allocation of two Service Dept cost using Solver as per book.

allocate Human Resources costs and processing time to allocate Information Systems costs. The following data are available for the year: 19 Reciprocal Cost Allocation Consider E-books again. The controller of E-books reads a widely used textbook that states that “the reciprocal method is conceptually the most defensible.” He seeks your.

Joint cost allocations generally do not provide good decision making support, it is used primarily to account for cost allocation between inventory and cost of goods sold. References Multiple Choice Diﬃculty: 2 Medium Learning Objective: Explain why joint costs are allocated. Overhead Problem 3: Finolex Co.

Ltd. has three production departments and four service departments. The expenses of these departments as per primary distribution summary were as follows: The following information is also available in respect of production departments: Apportion the cost of various service departments to the production departments.

Table 3 provides what we call “direct” rules, which is the “solution” to the allocation problem. 2 The appropriate allocation is to allocate 47% (53%) of the Maintenance service department costs to Machining (Assembly), and to allocate 85% (15%) of the IS service department costs to Machining (Assembly).

1. Chapter 11 - Service Department and Joint Cost Allocation 11 Service Department and Joint Cost Allocation Solutions to Review Questions Companies allocate costs to estimate or assess the costs of their activities (products, processes, etc.). It is an estimate and subject to the problem that cost allocation contains an arbitrary.

The resulting reciprocal costs sum exactly to the original budgeted costs. What follows is a teaching note on solving for Reciprocal Costs using Excel and a set of fully specified linear equations, i.e., Manes' Net Services Model.

The resulting reallocated costs differ from those calculated using traditional Gross method formulas. 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.

Next, we. Service Department ‘X’ renders service to A, B and Y in the ratiowhile Service Department ‘Y’ renders service to A and B in the ratio Given that the direct labour hours in departments A and B are 1, hours and 2, hours respectively, find the power cost per labour hour in.

If T&C uses the reciprocal method to allocate service department costs, and allocates fixed and variable costs using a separate rate for each (i.e. using the dual rate method), what is the rate (\$ per hr of service) that would be used to allocate the variable costs of the IT Department to the production departments.

(If necessary, round your answer to two decimal places.). Required: Allocate the cost of service departments to operating departments using direct method of cost allocation.

Solution * Department A’s cost has been allocated on the basis of employee hours: 9, hours + 15, hours = 24, hours. Allocated to department X: \$, × (9/24) = \$67, Allocated to department Y: \$, × (15/ Keywords: Service Department Cost Allocation, Reciprocal Method, Excel Matrix Operations.

INTRODUCTION n general, there are three methods available to allocate service department costs to production \$, Post allocation costs of P Solutions Matrix. service department cost allocation problem. As practitioners become more aware of the. Accounting Q&A Library Support department cost allocation—reciprocal services method Davis Snowflake & Co.

produces Christmas stockings in its Cutting and Sewing departments. The Maintenance and Security departments support the production of the stockings. Costs from the Maintenance Department are allocated based on machine hours, and costs from the Security Department are.

CHAPTER 18 Allocation of Support Activity Costs and Joint Costs Answers to Review Questions. When cost accounting, the step-down allocation method allows support departments to allocate costs to each other — and ultimately to the operating departments.

To accomplish this, the support departments are ranked. The ranking is often based on the percentage of costs that a support department incurs to support other support departments. The support department with [ ]. Reciprocal Method: A method of allocation of cost that fully recognizes the interaction among support department is known as reciprocal method.

It uses a simultaneous linear equation system to account for the support department interactions. Reciprocal method fully accounts for support department interactions while allocating the cost.

This method is an attractive alternative to explain and solve the service department cost allocation problem and should make the reciprocal method more accessible to managers. THE RECIPROCAL METHOD Consider an example using two service departments, S1 and S2, and two operating departments, P1 and P2.

These are all problems of cost allocation, the subject of this chapter. University presidents, city man-agers, corporate executives, and others all face problems of cost allocation. This is the first of three chapters on cost accounting systems—the tech-niques used to determine the cost of a product or service.

A cost accounting sys. (30 min.) Reciprocal cost allocation (continuation of ). 1. The reciprocal allocation method explicitly includes the mutual services provided among all support departments.

Interdepartmental relationships are fully incorporated into the support department cost allocations. 2. HR = \$72, + IS. IS = \$, + HR.are accounted for and that the pre-allocation costs total \$, Post-allocation dollars will equal the same \$, pre-allocation costs, but these will be housed entirely in departments P 1, P 2, and P 3.

2. The Excel Solver Calculation Section is used to interact with Excel’s Solver Function. 3. The Solver Solutions Results Section is.Service department cost allocation is the first stage in a two-stage system. Suppose a company has a purchasing department that is responsible for buying all materials, including miscellaneous supplies for the company’s three production departments.