Following chart depicts the methods of re-distribution of service department costs to production departments:
(i) 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. Thus, proper apportionment cannot be done and the production departments may either be overcharged or undercharged. The share of each service department cannot be ascertained accurately for control purposes. Budget for each department cannot be prepared thoroughly. Therefore Department Overhead rates cannot be ascertained correctly.
Illustration 1:
In a light engineering factory, the following particulars have been collected for the three months’ period ended on 31st March, 2012. You are required to re-apportion the service departments’ expenses to production departments.
Apportion the expenses of service department S2 in proportion of 3: 3: 4 arid those of service department S1 in the ratio of 3: 1: 1 to departments P1, P2 and P3 respectively.
Solution:
(ii) 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 the production departments.
Illustration 2:
A manufacturing company has two Production Departments, P1 and P2 and three Service Departments, Time-keeping, Stores and Maintenance. Time-keeping department is rendering services to two production departments and two other service departments, stores department is rendering services to maintenance department along with production departments and maintenance department is rendering services to production departments only. The Departmental Summary showed the following expenses for July, 2011.
The most important limitation of this method is that cost of one service centre to other service cost centres is ignored and thus the cost of individual cost centres are not truly reflected.
(iii) 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.
There are three methods available for dealing with inter-service departmental transfer;
(a) Simultaneous Equation Method,
(b) Repeated Distribution Method and
(c) Trial and Error Method.
(a) Simultaneous Equation Method:
Under this method, the true cost of the service departments are ascertained first with the help of simultaneous equations; these are then redistributed to production departments on the basis of given percentage. This method is preferable and is widely used even if the number of service departments are more than two. Due to the availability of computer it is not difficult to solve sets of simultaneous equations. Following illustration may be taken to discuss the application of this method.
Illustration 3:
A company has three production departments and two service departments, and for a period the departmental distribution summary has the following totals:
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FAQs
The Repeated Distribution Method is a method for estimating the demand for a product over time. The demand for a product is estimated by dividing the total demand for the product by the number of time periods in which the product is available.
What is the direct re-distribution method? ›
(i) 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.
What are the methods of distribution of service department overheads to production departments? ›
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 are the steps in overhead distribution? ›
Steps of Factory Overhead costing- Manufacturing overhead costing comprised of the following steps- (i) Collection of factory overhead costs (ii) Allocation of overhead costs (iii) Apportionment or distribution of overhead costs (iv) Re-distribution of service department cost to production department (v) Absorption of ...
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 is the difference between reciprocal method and step-down method? ›
The Reciprocal Distribution Method
The direct method allows for the quick assigning of costs, but only to production departments. Meanwhile, the step-down method allows you to assign costs from one service department to another, but those costs can only go in one direction.
What is re distribution in cost accounting? ›
What is a Redistributed Cost? A redistributed cost is a cost that has been allocated from one department to another. This situation arises when the costs of a service department (such as the IT department or the janitorial department) are charged out to other departments within a business that utilize their services.
What is distribution method in cost accounting? ›
The distribution method in distribution cost accounting corresponds to the manufacturing process in production cost accounting. Both act as an interface of a different type to allocate direct costs and overhead costs to cost objects according to the cost-by-cause principle.
What is secondary distribution method in cost accounting? ›
Secondary distribution, in the context of cost accounting, refers to the allocation of service (or support) department costs to production departments within an organization.
What are the two most frequently used methods of distributing service department costs to production departments? ›
Direct method - allocates each service department's costs individually to the production departments. Step method - allocate service department costs in a sequential method. The allocation of the first service department will move costs to other service departments plus production departments.
There are three methods for allocating service department costs: direct, sequential, and reciprocal. The first step of each method is to classify each organizational unit as either an operating or service department.
What are the three methods of departmental cost allocation? ›
mined, a method to apportion service department costs must be selected. Three common methods are: (1) the direct method, (2) the step (or sequential) method, and (3) the reciprocal method.
How do you distribute overhead costs? ›
Allocate Overhead Costs
Apply the overhead by multiplying the overhead allocation rate by the number of direct labor hours needed to make each product. If product X requires 50 hours, you must allocate $166.5 of overhead (50 hours x $3.33) to this product.
What are the three types of overhead? ›
Overhead costs can be fixed, variable, or a hybrid of both. There exist different categories of overhead, such as administrative overhead, which includes costs related to managing a business. The income statement reports overhead expenses.
How to prepare an overhead distribution summary? ›
The first step in overhead distribution is the collection of overheads. This means the ascer- tainment of the total amount spent on each item of overheads during a particular period. b e alphabetical (Mnemonic method), numerical or a combination of both. indirect labour and so on.
What is the direct distribution method in cost accounting? ›
The direct method is the most widely-used method. This method allocates each service department's total costs directly to the production departments, and ignores the fact that service departments may also provide services to other service departments.
What is step distribution method in cost accounting? ›
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 reciprocal method of apportionment? ›
The reciprocal method
This approach is used where some service cost centres provide services to other service cost centres, and the service is reciprocated.
What is the step down method of apportionment? ›
The step-down method is also called the sequential method. This method allocates the costs of some service departments to other service departments, but once a service department's costs have been allocated, no subsequent costs are allocated back to it. The choice of which department to start with is important.
