Reciprocal Allocation Method
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The document explains the reciprocal allocation method used in management accounting for distributing indirect costs among departments, specifically addressing the challenges posed by reciprocal charges between service departments. Through a detailed example involving four departments, it outlines a two-step cost allocation process, including the elimination of reciprocal charges and the final allocation of costs. The document provides formulas and calculations for determining the total costs for each department involved.
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.
- 3. Introduction: One of the problems in using departmental cost allocation method, is the existence of reciprocal charges between service departments. Through a practical example we will see how to solve this problem.
- 4. Departmen ts Labour Expenses Supplies Depreciation A 14.000,00 4.800,00 7.600,00 B 10.625,00 3.125,00 5.375,00 X 5.125,00 5.875,00 4.000,00 Y 4.225,00 1.825,00 4.495,00 Example: A company has four departments, two production departments (A and B) and two service departments (X and Y). The overhead analysis sheet provides the following costs:
- 5. Source Destination A B X Y Department X 45% 20% -- 35% Department Y 42% 50% 8% -- Example: Apart from the cost information, we have also the charge percentage of service departments:
- 6. QUESTION: Present the two-stage cost allocation process. Example:
- 7. 1st STEP: Elimination of reciprocal charges. Proposed Solution:
- 8. x: Total Costs of Service Department X y: Total Costs of Service Department Y Proposed Solution:
- 9. x = 15.000 + 0,08y y = 10.545+ 0,35x ⎧ ⎨ ⎩ Proposed Solution: x: Total Costs of Service Department X y: Total Costs of Service Department Y
- 10. x = 15.000 + 0,08y y = 10.545+ 0,35x ⎧ ⎨ ⎩ ⇔ − y = 10.545+ 0,35× 15.000 + 0,8y( ) ⎧ ⎨ ⎪ ⎩⎪ Proposed Solution: x: Total Costs of Service Department X y: Total Costs of Service Department Y
- 11. x = 15.000 + 0,08y y = 10.545+ 0,35x ⎧ ⎨ ⎩ 10.545 5.250 0,028y y −⎧ ⇔ ⎨ = + +⎩ ⇔ − y = 10.545+ 0,35× 15.000 + 0,8y( ) ⎧ ⎨ ⎪ ⎩⎪ Proposed Solution: x: Total Costs of Service Department X y: Total Costs of Service Department Y
- 12. x = 15.000 + 0,08y y = 10.545+ 0,35x ⎧ ⎨ ⎩ 10.545 5.250 0,028y y −⎧ ⇔ ⎨ = + +⎩ ⇔ − 0,972y = 15.795 ⎧ ⎨ ⎩ ⇔ − y = 10.545+ 0,35× 15.000 + 0,8y( ) ⎧ ⎨ ⎪ ⎩⎪ Proposed Solution: x: Total Costs of Service Department X y: Total Costs of Service Department Y
- 13. x = 15.000 + 0,08y y = 10.545+ 0,35x ⎧ ⎨ ⎩ 10.545 5.250 0,028y y −⎧ ⇔ ⎨ = + +⎩ ⇔ − 0,972y = 15.795 ⎧ ⎨ ⎩ ⇔ − y = 10.545+ 0,35× 15.000 + 0,8y( ) ⎧ ⎨ ⎪ ⎩⎪ ⇔ − y = 16.250 ⎧ ⎨ ⎩ Proposed Solution: x: Total Costs of Service Department X y: Total Costs of Service Department Y
- 14. x = 15.000 + 0,08y y = 10.545+ 0,35x ⎧ ⎨ ⎩ 10.545 5.250 0,028y y −⎧ ⇔ ⎨ = + +⎩ ⇔ − 0,972y = 15.795 ⎧ ⎨ ⎩ ⇔ x = 15.000 + 0,08×16.250 y = 16.250 ⎧ ⎨ ⎩ ⇔ − y = 10.545+ 0,35× 15.000 + 0,8y( ) ⎧ ⎨ ⎪ ⎩⎪ ⇔ − y = 16.250 ⎧ ⎨ ⎩ Proposed Solution: x: Total Costs of Service Department X y: Total Costs of Service Department Y
- 15. x = 15.000 + 0,08y y = 10.545+ 0,35x ⎧ ⎨ ⎩ 10.545 5.250 0,028y y −⎧ ⇔ ⎨ = + +⎩ ⇔ − 0,972y = 15.795 ⎧ ⎨ ⎩ ⇔ x = 15.000 + 0,08×16.250 y = 16.250 ⎧ ⎨ ⎩ ⇔ − y = 10.545+ 0,35× 15.000 + 0,8y( ) ⎧ ⎨ ⎪ ⎩⎪ ⇔ x = 16.300 y = 16.250 ⎧ ⎨ ⎩ ⇔ − y = 16.250 ⎧ ⎨ ⎩ Proposed Solution: x: Total Costs of Service Department X y: Total Costs of Service Department Y
- 16. 2nd STEP: Two-stage cost allocation process. Proposed Solution:
- 17. Description Production Departments Service Departments Total A B X Y Proposed Solution:
- 18. Description Production Departments Service Departments Total A B X Y 1st-Step Cost Allocation 26.400,00 19.125,00 15.000,00 10.545,00 71.070,00 Proposed Solution:
- 19. Description Production Departments Service Departments Total A B X Y 1st-Step Cost Allocation 26.400,00 19.125,00 15.000,00 10.545,00 71.070,00 Department X (1) 7.335,00 (3) 3.260,00 (16.300,00) (5) 5.705,00 Department Y (2) 6.825,00 (4) 8.125,00 (6) 1.300,00 (16.250,00) ( ) ( ) ( ) 1 0,45 16.300 2 0,42 16.250 3 0,20 16.300 × × × 4( )0,50 ×16.250 5( )0,35×16.300 6( )0,08×16.250 Proposed Solution:
- 20. Description Production Departments Service Departments Total A B X Y 1st-Step Cost Allocation 26.400,00 19.125,00 15.000,00 10.545,00 71.070,00 Department X (1) 7.335,00 (3) 3.260,00 (16.300,00) (5) 5.705,00 Department Y (2) 6.825,00 (4) 8.125,00 (6) 1.300,00 (16.250,00) 2nd-Step Cost Allocation 40.560,00 30.510,00 0 0 71.070,00 ( ) ( ) ( ) 1 0,45 16.300 2 0,42 16.250 3 0,20 16.300 × × × 4( )0,50 ×16.250 5( )0,35×16.300 6( )0,08×16.250 Proposed Solution: