Question

Explain and reflect on different cost allocation methods. Please include reflection on why there are different methods, and to what they each contribute.

Hi, I'm looking for a really elaborate answer, can someone help me out?

Answer 1

There are two departments in organisation such as operating and service department.these operating department perform the primary purpose of the company--to produce goods and services for consumers

Examples of operating department are the assembly departments in manufacturing firms

The cost of service departments are allocated to operating departments because they exist to support the operating department

It is crucial that these service department cost to be allocated to the operating department so that cost of conducting business in the operating departments are clearly and accurately reflected.

Accountants allocate service department cost using some type of base.when the company manager choose base to use,they consider such criteria as the type of service provided,the benefits received and fairness of the allocation method.

There are three methods to allocate service department cost to operating department such as

1.direct method:

It is the simplest method of the three.the direct method allocates cost of each service department to operating department based on each department share of the allocation base . services used by other service department is ignored

2.step method

This method allocates service department cost to operating department and other service departments in a sequential procees.the sequence of allocation is generally starts with service department that has incurred the greatest cost.after this department cost have been allocated,the service department cost with next highest to be allocated and so forth untill service department cost is lowest costs has had its allocated.costs are not allocated back to the department that has already had all of its costs allocated.

3.reciporcal method.

Th third method is most complicated but also most accurate.the reciprocal method allocates service department cost to operating department and other service departments.under reciprocal cost,the relationship between service department is recognised and cost is allocated to and from each service department for service provided.