What Are The Three Methods Of Allocating Service Department Costs?

There are three methods for allocating service department costs:

direct, sequential, and reciprocal

.

What process is used to allocate support department costs?

There are three methods of allocating support department costs:

the direct, step-down and reciprocal

. The key differences among the methods are the assumptions as to how services provided by one support department are allocated to other support departments.

What method is most accurate when allocating service department costs to operating departments?

(c)

The Reciprocal Method

: The reciprocal method is the most accurate of the three methods for allocating service department costs because it recognizes reciprocal services among service departments.

Which of the following is one of the methods of allocating support department costs to operating departments that partially recognizes mutual service provided among all support departments?

The step-down (allocation) method

allocates support-department costs to other support departments and to operating departments in a sequential manner that partially recognizes the mutual services provided among all support departments.

How do you allocate operating costs?

1. Determine program services and supporting activities. …
2. Determine direct and indirect expenses. …
3. Determine proper allocation methods for indirect expenses. …
4. Apply allocation methods to indirect expenses.

What cost allocation method is the most accurate?

The third method

is the most complicated but also the most accurate. The reciprocal method allocates services department costs to operating departments and other service departments.

How do you allocate direct costs?

Direct allocation method. Charge the

applicable cost

of these departments directly to the production part of the business. These costs form a portion of the overhead cost of production, which is then allocated to inventory and the cost of goods sold.

What is the High Low method?

The high-low method is an

accounting technique used to separate out fixed and variable costs in a limited set of data

. It involves taking the highest level of activity and the lowest level of activity and comparing the total costs at each level.

Which is known as step method?

Unlike direct method, the step method (also known as

step down method

) allocates the cost of a service department to other service departments as well as to operating departments. The cost allocation under step method is a sequential process.

How do you allocate fixed costs?

A simple way to assign or allocate the fixed costs is

to base it on things such as direct labor hours, machine hours, or pounds of direct material

. Accountants realize that this is simplistic; they know that overhead costs are caused by many different factors.

What are the four cost allocation methods?

• Direct labor.
• Machine time used.
• Square footage.
• Units produced.

What are the main purposes of allocating it costs to user departments?

The four main purposes for allocating costs are

to predict the economic effects of planning and control decisions

, to motivate managers and employees, to measure the costs of inventory and cost of goods sold, and to justify costs for pricing or reimbursement.

Why should a service department budgeted cost rather than its actual costs be charged to operating departments?

The use of budgeted costs rather than actual cost rates for allocating variable costs of

service departments protects the user departments from intervening price fluctuations

and also often protects them from inefficiencies in the service departments.

What is the best allocation method?

There are three primary cost allocation methods used by organizations based on how the expenditures are generated.

The step method

is best when all costs are internal. For this method, one department within an organization provides a service directly to another.

How do you allocate overhead costs?

1. Add up total overhead. …
2. Compute the overhead allocation rate by dividing total overhead by the number of direct labor hours. …
3. Apply overhead by multiplying the overhead allocation rate by the number of direct labor hours needed to make each product.

What happens if the costs are not allocated?

When costs are allocated in the right way, the business is able to trace the specific cost objects that are making profits or losses for the company. If costs are allocated to the wrong cost objects,

the company may be assigning resources to cost objects that do not yield as much profits as expected

.