Accounting textbooks typically cover three methods for allocating service department costs: (1) the direct method, (2) the step-down or sequential method and (3) the reciprocal method. Both the direct and step-down methods are easy to apply, but both of these methods are flawed because they do not allow the full allocation of reciprocal service costs. By contrast, the reciprocal method allows complete freedom in allocating service department costs to other service departments as well as to operating departments. Unfortunately, the reciprocal method is often overlooked in the classroom because its application requires solving a series of simultaneous equations through the use of matrix algebra.
This paper presents a multiple department service cost allocation problem. We first “solve” the allocation problem using the direct and step-down methods, and then fully demonstrate how the reciprocal method can be applied quickly and easily using an Excel spreadsheet.
This article is from the Accounting Instructors’ Report, an electronic journal that provides teaching tips and insights to those who teach accounting and other business courses.
Gerald K. DeBusk, University of Tennessee – Chattanooga
Timothy B. Forsyth, Appalachian State University