Question

what are the three methods of allocatinf service department charges and ehat is one good point of each and one bad point for each

Answer 1

Solution:

Methods of allocating support or service department cost to production department include direct method, step-down method and reciprocal method.

1. Direct Method: The direct method is the most widely-used method where it allocates each service department’s total costs directly to the production departments. Good Point: It ignores the fact that service departments may also provide services to other service departments. Bad Point: Under this method, there is no interaction between service departments prior to allocation.
2. Step-Down Method: The step-down method or known as sequential method allocates the costs of some service departments to other service departments. However, once a service department’s costs have been allocated, no subsequent costs are allocated back to it. The choice of which department to start with is very important. Good Point: The sequence in which the service departments are allocated usually effects the ultimate allocation of costs to the production departments, in that some production departments gain and some lose when the sequence is changed. Hence, production department managers usually prefer over the sequence. Bad Point :The most defensible sequence is to start with the service department that provides the highest percentage of its total services to other service departments, or the service department with the highest costs, or the service department that provides services to the most number of service departments, or some similar criterion.
3. Reciprocal Method: The reciprocal method is the most accurate among the three methods for allocating service department costs. Good Point : It is the best method because it recognizes reciprocal services among service departments. Bad Point: However, it is also the most complicated method, because it requires solving a set of simultaneous linear equations.