Question

For an IT department that supports an accounting department as well as other functional areas of the company, which cost allocation method would you choose? Provide support for the basis of your decision.

Chose from direct method, step method, and reciprocal method.

Answer 1

The best method to allocate service department cost is

RECIPROCAL METHOD

RECIPROCAL METHOD

The reciprocal method fully recognizes all inter departmental service cost using simultaneous equations. In contrast . In step down method provide only partial recognition of the support that service departments give one another . Although the reciprocal method is a true recognition method and it is the most accurate method.

The direct method full ignore the inter department services and step down method give them only a partial recognition because step down method allocate cost forward and newer backward . To overcome this problems with the use of reciprocal method which fully recognizes inter department services and provide greater exactness in allocating the cost of service departments to other departments. It uses a simultaneous equation technique so the reciprocal method is also refers to as simultaneous equation technique and algebraic method of department cost allocation.

The above are the detailed explanation why reciprocal method is best than direct method and step down method.

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