Question

discuss allocation of service department costs?

Answer 1

Service department costs are to be reapportioned to the production departments or the cost centres where production is going on. This process of re-apportionment of overhead expenses is known as ‘Service Distribution’.

The following are the various methods of re-distribution of service department costs to production departments.

1. Direct re-distribution method

2. Step distribution method

3. Reciprocal Services method

a. Simultaneous Equation Method

b. Repeated Distribution Method

c. Trial and Error Method

Direct re-distribution method Under this method, the costs of service departments are directly apportioned to production departments without taking into consideration any service from one service department to another service department.

Step Distribution Method Under this method, the cost of most serviceable department is first apportioned to other service departments and production departments. The next service department is taken up and its cost is apportioned and this process goes on till the cost of the last service department is apportioned. Thus, the cost of last service department is apportioned only to production departments.

Reciprocal Services Method In order to avoid the limitation of Step Method, this method is adopted. This method recognizes the fact that if a given department receives service from another department, the department receiving such service should be charged. If two departments provide service to each other, each department should be charged for the cost of services rendered by the other.