Methods of Apportionment of Service Department Overheads!
(a) Step-Ladder Method:
Under this method, expenses of one service department (generally the one which received the least service and gives the maximum service from and to other service departments) are apportioned to all other departments in the proportion of benefit derived by them; then expenses of the next service department are apportioned to the remaining departments and so on till expenses of all service departments are dealt with.
Illustration 1:
For a period, the expenses in the various departments of a factory were as follows:
Illustration 2 :
There are three production departments in a factory viz. Turning, Milling, and Grinding. The factory also keeps four service departments viz. Stores, Planning, Canteen and Time Office.
Departmental overheads for the month of November 2003 are as under:
Illustration 3:
Company’s costing books for the year ended 30th June, 2004 furnish the following information:
(b) Inter-Service Departmental Mutual Allocation System (Simultaneous Equation Method):
The method given above assumes that service is rendered by say, Repairs and Maintenance department to the Power House but not by the latter to the former. This assumption is not valid since service departments not only render service to production departments but also mutually. This fact should be considered while apportioning expenses.
An algebraical equation will be needed to ascertain the true expenses of a service department in such cases. Suppose a factory has two production departments. A and B, and two service departments X and Y: the expenses of departments X and Y are respectively 3,000 and 2,000 and are to be apportioned as:
Illustration 4:
You are supplied with the following information and required to work out the production hour rate recovery of overhead in departments A, B and C reapportioning service department expenses by simultaneous equation method as well as by repeated distribution method:
(c) “Cycles” Methods or Repeated Distribution Method:
Instead of having an algebraic equation, the expenses of one service department may be apportioned to all other departments (production as well as service) and then the expenses of other service departments may be similarly treated until the amount apportioned to a service department becomes insignificant. Then the service departments may be ignored for apportioning the expenses.
The figures in the illustration given in the beginning under simultaneous equation method may be treated as below:
Illustration 5:
Solve previous illustration according to ‘Repeated Distribution Method’.
illustration 6:
You are given the following information in respect of overheads in a factory:
(d) Trial and Error Method:
In this method the overheads of each service department is allocated only to other service department in the given basis or ratio. Thus true overhead cost of each service department is ascertained. Thereafter these are distributed to production department.
Comments are closed.
FAQs
The apportioned overheads are absorbed to products on the basis of the normal capacity or actual capacity, whichever is higher. In case of under-absorption or over-absorption of administrative overheads relating to production, the same shall also be adjusted with Costing Profit & Loss Account.
Which method is used for apportioning service department expenses? ›
The direct method
This is the simplest method and is ideal to use when service cost centres provide services to production cost centres, but not to each other.
What are the methods of distribution of service department overheads to the production department? ›
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.
What methods can be used to re assign service department overheads? ›
There are three methods for allocating service department costs: direct, sequential, and reciprocal.
What is apportionment of service department cost? ›
Apportionment of cost refers to the distribution of various overhead items, in proportion, to the department on a logical basis. The apportionment will share the cost among multiple cost units, in the proportion of expected benefit received.
What are the three methods of overhead allocation? ›
Three commonly-used methods include allocating overhead based on direct labor, machine hours, or square footage. It's important that contractors choose the methodology most appropriate for their particular business and the types of projects they pursue.
What are the three methods of allocating service department costs? ›
Short Answer. In summary, there are three methods to allocate the costs of support departments to operating departments: the Direct Method, the Step-Down Method, and the Reciprocal Method.
How do you allocate service department costs? ›
To allocate the service department costs to each operating department, we will take the amount of the cost driver (machine hours for maintenance and employees for administration) x the allocation rate we just calculated.
What is the step method of service department cost allocation? ›
The second method of allocating service department costs is the step method. This method allocates service costs to the operating departments and other service departments in a sequential process. The sequence of allocation generally starts with the service department that has incurred the greatest costs.
What is the most accurate method for allocating service department costs? ›
The reciprocal method is the most accurate of the three methods for allocating service department costs, because it recognizes reciprocal services among service departments. It is also the most complicated method, because it requires solving a set of simultaneous linear equations.
1. Primary Apportionment. Many overhead expenses are incurred for the common benefit of several departments. Examples include the costs of fire insurance, repairs and maintenance, and rent. To apportion expenses at the primary apportionment stage, such items are apportioned to benefiting departments.
What is the difference between apportionment and allocation of overheads? ›
Thus allocation is a direct process of identifying overheads to cost units or cost centres. So the term allocation means allotment of whole item of cost to a particular cost centre or cost object without any division. Cost Apportionment is the allotment of proportions of items to cost centers.
Which of the following is a method of allocation used to assign service department costs to production departments but not to other service departments? ›
The direct method recognizes no mutual support between service departments and so only allocates service department cost to operating departments, never to other service departments.
What is the step method of overhead allocation? ›
In the step allocation method, the service department with the largest percentage of costs going to other services departments allocates its costs to those other services departments first.
Why and how are overhead costs allocated to products and services? ›
Overhead costs are allocated to products to provide information for internal decision making, to promote the efficient use of resources, and to comply with U.S. Generally Accepted Accounting Principles.
What are the methods of apportionment? ›
The apportionment methods are Jefferson's method, Hamilton's method, Webster's method, Hill's method, Dean's method, and Adams's method. These methods are some of the most frequently used apportionment methods, although readers might know them by different names.
What are the methods of cost apportionment? ›
The main methods of cost apportionment include the direct method, step-down method, and reciprocal method. The direct method allocates costs directly to the relevant cost centers or objects based on the primary driver of the cost.
What are the methods of apportionment in cost accounting? ›
In order to apportion the cost of electricity to one specific department, you simply multiply the amount of the overhead by the number of employees in that department, then divide that by your total number of employees.
What are the two methods of apportionment of expenses? ›
Common methods include the physical units method, where costs are allocated based on the quantity of each product, and the sales value at split-off method, allocating costs based on the relative market values of the products.
