Question

Why is the direct method of support department cost allocation less accurate than the sequential and reciprocal services methods?

How does management determine the order in which support department costs are allocated under the sequential method?

Answer 1

Solution:

Direct method of support department cost allocation is less accurate than sequential and reciprocal services methods because direct method of cost allocation ignores any services rendered by one support department to another and allocates each support department's cost directly to the operating departments.While sequential method allocates support department costs to support departments and operating departments in a sequential manner which partially recognizes the mutual services provided among all support departments.Therefore this method may be more accurate than direct method because it recognizes some interactions among the support departments. Reciprocal services method allocates support department costs to support departments and operating departments in a by fully recognizing the mutual services provided among all support departments and therefore the most accurate.

In sequential method of allocation cost allocations are made in a step-down fashion. The cost of the support department rendering the greatest service are allocated first.Once a support departments cost have been  allocated no costs are allocated back to it.The costs allocated from support department are its direct costs plus any costs it receives in allocations from other support departments.