Reciprocal Method of Cost Allocation - Accounting Details

Reciprocal method is a method of allocating service department costs to other departments that gives full recognition to interdepartmental services. Menu Definition: Reciprocalmethodisamethodofallocatingservicedepartmentcoststootherdepartmentsthatgivesfullrecognitiontointerdepartmentalservices. Explanation: Thereciprocalmethodgivesfullrecognitiontointerdepartmentalservices.Underthestepmethod,onlypartialrecognitionofinterdepartmentalservicesispossible.Thestepmethodalwaysallocatescostsforwardneverbackward.Thereciprocalmethod,bycontrast,allocatesservicedepartmentcostsinbothdirections.Thereciprocalallocationrequirestheuseofsimultaneousequations.Thismethodisalsoknownasalgebraicmethodandsimultaneousequationsmethod. Underthismethodthetruecostoftheservicedepartmentsarecomputedfirstwiththehelpofsimultaneousequationsandthesearethendistributedtoproducingdepartmentsonthebasisofgivenpercentageorratio.Rememberthattruecostoftheservicedepartmentmeansthecostoftheservicedepartmentwhichincludesoriginalcostofthedepartmentplustheshareoftheotherservicedepartment.Themainadvantageofthismethodistohaveanaccuratedistributioninasinglestepinthedistributionsummary.]   Example: Acompanyhastwoserviceandtwoproducingdepartments.Thetwoservicedepartmentsservenotonlytoproducingdepartmentsbutalsotoeachother.Thedepartmentalestimatesforthenextyearareasfollows. Producingdepartments: A BServicedepartments: X Y 50,000 40,000 10,000 8,800 Theservicedepartmentscostsaretobedistributedasunder: CostofX:50%toA,40%toB,and10%toY CostofY:40%toA,40%toB,and20%toX Required: Transfertheservicedepartmentscoststoeachotherandtoproducingdepartments. Solution: Nowwesolvethegivenillustrationfirstusingthesimultaneousequationmethodasfollows:Originalcostsofservicedepartments: X=Rs.10,000 Y=Rs.8,800 Aftergettingthesharefromdistributionofservicedepartments: X=Rs.10,000+20%Y Y=Rs.8,800+10%X ByputtingthevalueofYinequation(1) X=Rs.10,000+20%(Rs.8,800+10%X) X=Rs.10,000+1760+0.2X X–0.02X=Rs.10,000+Rs.1,760 0.98X=Rs.11,760 X=11760/0.98 =Rs.12,000 ByputtingthevalueofXinequation(2) Y=Rs.8,800+10%(Rs.12000) Y=Rs.8,800+Rs.Rs.1,200 =Rs.10,000 DistributionSummary Department Producing Service Originalcosts Distributionofservicedepartmentcosts: X YTotaldepartmentaloverheads A Rs 50,0006,000 4,000 ——- 60,000 ===== B Rs 40,0004,800 4,000 —— 48,800 ===== X Rs 10,000(12,000) 2,000 ——- Nil ===== Y Rs 8,8001,200 (10,000) ——- Nil ===== UseofReciprocalMethod: Thismethodisrarelyusedinpracticefortworeasons.First,thecomputationsarerelativelycomplex.Althoughthecomplexityissuecouldbeovercomebyuseofcomputers,thereisnoevidencethatcomputershavemadethereciprocalmethodmorepopular.Second,thestepmethodusuallyprovidesresultsthatareareasonableapproximationoftheresultsthatthereciprocalmethodwouldprovide.Thus,companieshavelittlemotivationtousethemorecomplexreciprocalmethod. Youmayalsobeinterestedinterestedinotherarticlesfrom“servicedepartmentcosting”chapter: SelectingAllocationBases DirectMethodofCostAllocationinServicedepartmentcosting StepMethodofCostAllocationinServiceDepartmentCosting ReciprocalMethodofCostAllocation-ServiceDepartmentCosting OtherRelatedAccountingArticles: ServiceDepartmentCosting StepMethodofCostAllocation SelectingAllocationBase Differencebetweenjobcostingandprocesscosting TargetCostingApproachtoPricing DefinitionandExplanationofProcessCostingSystem Characteristicsofprocesscostingsystem SystemNormalCostingDefinition DefinitionandExplanationofActivityBasedCostingSystem AbsorptionCostingDefinition Tweet PinIt AbidaRehman Costing NoComments  Home  »  Costing  »  ReciprocalMethodofCostAllocation–ServiceDepartmentCosting AboutTheAuthor Abida LeaveaReplyCancelreplyYouremailaddresswillnotbepublished.Requiredfieldsaremarked*Comment Savemyname,email,andwebsiteinthisbrowserforthenexttimeIcomment. 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