Allotment of Reciprocal Services

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What is Allotment of Reciprocal Services Method or Re-Apportionment Method or Allocation of Service Department Overheads to Production Department Overheads?

Definition and Procedure:

A type of cost allocation method in which, when a factory has more than one service department, these departments render services to each other and as well to the production department. In other words when in a given period, a service department receives a service from other service departments then the department receiving the service should be charged. This is known as allotment of reciprocal services or re-apportionment method.

Types:

There are number of ways in which allocated and apportioned overheads are allotted to producing department and all of them approximately show the same results. Following methods may be used to allocate service department costs to producing department.

(1) Repeated Distribution Method or Attrition or Continuous Allotment Method:

Definition, Procedure and Explanation:

Under repeated distribution method or attrition or continuous allotment method, the service department costs are repeatedly allotted or transferred to other departments according to the use that they make of service departments until the remaining amount is insignificant to distribute. This process of overhead allotment is repeated again and again to the point where the overheads shown for all service departments are either nil (zero) or small enough to ignore.

Solved Example:

ABC Engineering Co is organized into five departments. Departments A, B and C are production departments, and X and Y are service departments serving not only to production departments but also to each other. Details are shown below for the following year ending 30 September 2016:

The service departments are to be allotted as follows:

Required:

Use the continuous allotment method to apportion X’s and Y’s overheads to other departments.

Solution:

FOH Allotment Sheet (Continuous Allotment Method)

• The residual amount of \$7 in department Y is considered insignificant and is therefore apportioned to production departments only.

(2) Algebraic or Simultaneous Equation Method:

Definition, Procedure and Explanation:

Under algebraic or simultaneous equation method, firstly total cost of the service department is determined with the help of simultaneous equations and then these total determined overheads are distributed to the departments on some fair or equitable basis. This method has the advantage to allot total amount of overheads in a single step.

After apportionment, total overheads of producing departments would include their original overheads and the share of cost of service departments transferred to them. This method calculates the same total costs for the production cost centers as calculated under continuous allotment method.

Solved Example:

Apply algebraic or simultaneous equation method to apportion X’s and Y’s overheads to other departments. (By using repeated distribution method’s example data),

Solution:

FOH Allotment Sheet (Simultaneous Equation Method)

(3) Elimination or Step Down Method:

Solved Example:

Apply elimination method to apportion X’s and Y’s overheads to other departments. (By using repeated distribution method’s example data),

Solution:

FOH Allotment Sheet (Elimination or Step Down Method)

In the above example, we can see that firstly department department X overheads (larger of the two) are allotted and then Y’s overheads are allotted only to production departments in the ratio 35:25:20, but the 20% to be apportioned to Y is ignored as this department has already been eliminated. This is elimination or step down method of cost allocation.