Which of the following refer to the only method of allocating service department costs to producing departments that considers reciprocal service?

Throughout this text, we have emphasized cost allocations only in the operating departments of a company. These operating departments perform the primary purpose of the company—to produce goods and services for consumers. Examples of operating departments are the assembly departments of manufacturing firms and the departments in hotels that take and confirm reservations.

The costs of service departments are allocated to the operating departments because they exist to support the operating departments. Examples of service departments are maintenance, administration, cafeterias, laundries, and receiving. Service departments aid multiple production departments at the same time, and accountants must allocate and account for all of these costs. It is crucial that these service department costs be allocated to the operating departments so that the costs of conducting business in the operating departments are clearly and accurately reflected.

Accountants allocate service department costs using some type of base. When the companies’ managers choose bases to use, they consider such criteria as the types of services provided, the benefits received, and the fairness of the allocation method. Examples of bases used to allocate service department costs are number of employees, machine-hours, direct labor-hours, square footage, and electricity usage.

There are three methods for allocating service department costs:

• The first method, the direct method, is the simplest of the three. The direct method allocates costs of each of the service departments to each operating department based on each department’s share of the allocation base. Services used by other service departments are ignored.
• 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. After this department’s costs have been allocated, the service department with the next
  highest costs has its costs allocated, and so forth until the service department with the lowest costs has had its costs allocated. Costs are not allocated back to a department that has already had all of its costs allocated.
• 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.  Under the reciprocal cost, the relationship between service departments is recognized and cost is allocated to and from each service department for services provided.

Next, we will look at each method.

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Chapter18.Allocation of Support Activity Costs and Joint Costs

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Chapter 18Responsibility Accounting and Transfer Pricing in Decentralized Organizations18–2174.The allocation of general overhead control costs to operating departments can beleastjustified in determininga.income of a product or functional unit.b.costs for making management’s decisions.c.costs of products sold.d.costs for government’s “cost-plus” contracts.ANSWER:bMEDIUM

Use the following information for questions 75–84.Gates Co. has three production departments A, B, and C.Gates also has two servicedepartments, Administration and Personnel.Administration costs are allocated based on valueof assets employed, and Personnel costs are allocated based on number of employees.Assumethat Administration provides more service to the other departments than does the PersonnelDepartment.Dept.Direct CostsEmployeesAsset ValueAdmin.$900,00025$450,000Personnel350,00010600,000A700,00015300,000B200,0005150,000C250,00010800,000

What is the only method of allocating service department cost to producing departments that considers reciprocal services?

Which method can be used to allocate service department costs to other departments?

Which service department allocation method provides reciprocal allocation of service costs as well as to the revenue production departments?

What is reciprocal method of cost allocation?