The reciprocal method of allocation recognizes all interactions of support departments. Under the reciprocal method, the usage of one support department by another is used to determine the total cost of each support department, where the total cost reflects interactions among the support departments. Then, the new total of support department costs is allocated to the producing departments. This method fully accounts for support department interaction.
Total Cost of Support Departments
To determine the total cost of a support department so that this total cost reflects interactions with other support departments, a system of simultaneous linear equations must be solved. Each equation, which is a cost equation for a support department, is the sum of the department’s direct costs plus the proportion of service received from other support departments.
Total cost = Direct costs +Allocated costs
The method is best described using an example. The same data used to illustrate the direct and sequential methods will be used to illustrate the reciprocal method in
Total Cost of Support Departments
To determine the total cost of a support department so that this total cost reflects interactions with other support departments, a system of simultaneous linear equations must be solved. Each equation, which is a cost equation for a support department, is the sum of the department’s direct costs plus the proportion of service received from other support departments.
Total cost = Direct costs +Allocated costs
The method is best described using an example. The same data used to illustrate the direct and sequential methods will be used to illustrate the reciprocal method in
Exhibit 7-11. The allocation ratios needed for the simultaneous equations are interpreted as follows: maintenance receives 20 percent of power’s output, and power receives 10 percent of maintenance’s output. Now let P equal the total cost of the power department and M equal the total cost of the maintenance department. As indicated previously, the total cost of a support department is the sum of its direct costs plus the proportion of service received from other support departments. Using the data and allocation ratios from Exhibit 7-11, the cost equation for each support department can be expressed as follows:
After the equations are solved, the total costs of each support department are known. These total costs, unlike the direct or sequential methods, reflect all interactions between support departments
Allocation to Producing Departments
Also read allocation based on relative market value
Once the total costs of each support department are known, the allocations to the producing departments can be made. These allocations, based on the proportion of output used by each producing department, are shown in Exhibit 7-12. Notice that the total costs allocated to the producing departments equal $410,000, the total direct costs of the two support departments ($250,000 +$160,000). Also read comparison of three methods direct method sequential and reciprocal
Once the total costs of each support department are known, the allocations to the producing departments can be made. These allocations, based on the proportion of output used by each producing department, are shown in Exhibit 7-12. Notice that the total costs allocated to the producing departments equal $410,000, the total direct costs of the two support departments ($250,000 +$160,000). Also read comparison of three methods direct method sequential and reciprocal
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