Reciprocal Method of Allocation | Managerial Accounting

In the reciprocal method, the relationship between the service departments is recognized. This means service department costs are allocated to and from the ... Skiptomaincontent Interestedinteachingthiscourse? Lumencanhelp!Reviewourup-to-dateManagerial Accountingbyclickingthelinkbelow.Fromthere,youcanrequestademoandreviewthecoursematerialsinyourLearning Management System (LMS). ReviewThisCourse Close ManagerialAccounting Appendix:ServiceDepartmentAllocation Searchfor: ReciprocalMethodofAllocation Thefinalmethod,isthereciprocalmethod. Althoughitisthemostaccurate,itisalsothemostcomplicated. Inthereciprocalmethod,therelationshipbetweentheservicedepartmentsisrecognized. Thismeansservicedepartmentcostsareallocatedtoandfromtheotherservicedepartments. Wecanbreaktheprocessupinto3stepssowecanmakesenseoftheprocess. Todemonstrate,wewillusethesamebasicdata: ServiceDept   OperatingDept   Maintenance Administration 1 2 Costs $8,000 $4,000 $32,000 $36,000 Machine-hoursused 1,000 2,000 1,500 2,500 NumberofEmployees 100 200 250 150 Step1: Determineallocationbases Justlikeyouwouldfordirectorstep,weneedtocalculatetheallocationbaseEXCEPTtheonlythingyouareexcludingisthedepartmentcostyouaretryingtoallocate—ALLotherdepartmentsareincluded. Wecancalculatetheallocationbaseamountforeachservicedepartmentasfollows: MaintenanceDept    AdministrationDept   MachHrs %ofTotal   Employees %ofTotal   Maintenance                         –                 –               100 20.00% (100/500) Administration                 2,000 2/6** (2,000/6,000)                   –                           –   Dept1                 1,500 25% (1,500/6,000)               250 50.00% (250/500) Dept2                 2,500 2.5/6** (2,500/6,000)               150 30.00% (150/500) Total                 6,000 100%               500 100.00% **sincethesenumbersdonotcomeoutevenly,wekeeptheminthefractionformandonlyroundthefinalanswertothenearestdollar. Step2:  Setuptheformulas.  Sincemaintenancecostsareallocatedtoadministrationandadministrationcostisallocatedtomaintenance—thingsgetinteresting. YouwillneedtodeterminetheTOTALcostbeingallocatedtoboththeAdministrationandMaintenanceDepartmentsfirst. (a)TotalMaintenancecost=Maintenancedepartmentcost+costallocatedtomaintenancefromadministration. (b)TotalAdministrationcost=Administrationdepartmentcost+costallocatedtoadministrationfrommaintenance. Wewillworkwiththeadministrationcostformulain(b)first: TotalAdministrationcost=Administrationdepartmentcost+costallocatedtoadministrationfrommaintenance. Fromstep1,weknowthecostallocationtoadministrationfrommaintenanceis(2/6xtotalmaintenancecost). Westilldonotknowwhattotalmaintenancecostbutwecanpluginthisnewformula. TotalAdministrationcost=$4,000administrationdepartmentcost+(2/6xtotalmaintenancecost) Wecaninserttheformulafrom(a)fortotalmaintenancecostintothetotaladministrationcostformula(b)asfollows: TotalAdministrationcost=$4,000admindepartmentcost+[2/6x(Maintenancedepartmentcost+costallocatedtomaintenancefromadministration)] Wecanseefromstep1thatadministrationcostisallocatedtomaintenanceastotaladministrationcostx20%. Addingthistoourformula,wenowhave: TotalAdministrationcost=$4,000admindepartmentcost+[2/6x($8,000Maintenancedepartmentcost+(totaladmincostx20%))] Usingalgebra,wecanassignTotalAdministrationCostavariableofAgivingtheformula: A=4,000+[2/6x($8,000+0.20)A] A=4,000+(2/6x8,000)+(2/6x0.20A) A=4,000+2,666.67+0.067A—rounded A=6,666.67+0.067A 1.0A–0.067A=6,666.67 0.933A=6,666.67 Aortotaladministrationcost=$7,145rounded Totalmaintenancecostcanbecalculatedas$8,000departmentcost+$1,429(7,145x20%)allocatedfromadministrationforatotalof$9,429. Step3: Showcostallocations NowthatyouhavetheTOTALCostofMaintenanceandPersonnel,itistimetoallocateitusingtheTotalCostamountsfromStep2andthepercentsfromStep1. ServiceDept   OperatingDept   Maintenance Administration 1 2 Costs $8,000 $4,000 $32,000 $36,000 Maintenancecostsallocated -9,429 3,143 2,357 3,929 (9,429x2/6) (9,429x25%) (,9429x2.5/6) Administrationcostsallocated 1,429 -7,145 3,572.50 2,143.50 (7,145x20%)   (7,145x50%) (7,145x30%) Totalcosts $0 ($2)** $37,930 $42,073 **differenceduetoroundingincalculations.   LicensesandAttributions AllrightsreservedcontentSupportCostAllocationUsingReciprocalMethod(ManagerialAccountingTutorial#34).Authoredby:NotePirate.Locatedat:https://youtu.be/NB0zsaPC4MI.License:AllRightsReserved.LicenseTerms:StandardYouTubeLicense Previous