This presentation shows the use of the reciprocal allocation method in order to overcome one of the main problems of the departmental cost allocation method in the field of management accounting.

1. HOW TO USE THE RECIPROCAL
ALLOCATION METHOD
By Paulino Silva

2. Introduction:
As part of management accounting, the use of departmental cost
allocation method for assigning indirect costs, despite its old origins,
it is still widely used today.

3. Introduction:
One of the problems in using departmental cost allocation method, is
the existence of reciprocal charges between service departments.
Through a practical example we will see how to solve this problem.

4. Departmen
ts
Labour
Expenses
Supplies Depreciation
A 14.000,00 4.800,00 7.600,00
B 10.625,00 3.125,00 5.375,00
X 5.125,00 5.875,00 4.000,00
Y 4.225,00 1.825,00 4.495,00
Example:
A company has four departments, two production departments (A and B) and
two service departments (X and Y). The overhead analysis sheet provides the
following costs:

5. Source
Destination
A B X Y
Department X 45% 20% -- 35%
Department Y 42% 50% 8% --
Example:
Apart from the cost information, we have also the charge percentage of
service departments:

6. QUESTION:
Present the two-stage cost allocation process.
Example:

7. 1st STEP:
Elimination of reciprocal charges.
Proposed Solution:

8. x: Total Costs of Service Department X
y: Total Costs of Service Department Y
Proposed Solution:

9. x = 15.000 + 0,08y
y = 10.545+ 0,35x
⎧
⎨
⎩
Proposed Solution:
x: Total Costs of Service Department X
y: Total Costs of Service Department Y

10. x = 15.000 + 0,08y
y = 10.545+ 0,35x
⎧
⎨
⎩
⇔
−
y = 10.545+ 0,35× 15.000 + 0,8y( )
⎧
⎨
⎪
⎩⎪
Proposed Solution:
x: Total Costs of Service Department X
y: Total Costs of Service Department Y

11. x = 15.000 + 0,08y
y = 10.545+ 0,35x
⎧
⎨
⎩
10.545 5.250 0,028y y
−⎧
⇔ ⎨
= + +⎩
⇔
−
y = 10.545+ 0,35× 15.000 + 0,8y( )
⎧
⎨
⎪
⎩⎪
Proposed Solution:
x: Total Costs of Service Department X
y: Total Costs of Service Department Y

12. x = 15.000 + 0,08y
y = 10.545+ 0,35x
⎧
⎨
⎩
10.545 5.250 0,028y y
−⎧
⇔ ⎨
= + +⎩
⇔
−
0,972y = 15.795
⎧
⎨
⎩
⇔
−
y = 10.545+ 0,35× 15.000 + 0,8y( )
⎧
⎨
⎪
⎩⎪
Proposed Solution:
x: Total Costs of Service Department X
y: Total Costs of Service Department Y

13. x = 15.000 + 0,08y
y = 10.545+ 0,35x
⎧
⎨
⎩
10.545 5.250 0,028y y
−⎧
⇔ ⎨
= + +⎩
⇔
−
0,972y = 15.795
⎧
⎨
⎩
⇔
−
y = 10.545+ 0,35× 15.000 + 0,8y( )
⎧
⎨
⎪
⎩⎪
⇔
−
y = 16.250
⎧
⎨
⎩
Proposed Solution:
x: Total Costs of Service Department X
y: Total Costs of Service Department Y

14. x = 15.000 + 0,08y
y = 10.545+ 0,35x
⎧
⎨
⎩
10.545 5.250 0,028y y
−⎧
⇔ ⎨
= + +⎩
⇔
−
0,972y = 15.795
⎧
⎨
⎩
⇔
x = 15.000 + 0,08×16.250
y = 16.250
⎧
⎨
⎩
⇔
−
y = 10.545+ 0,35× 15.000 + 0,8y( )
⎧
⎨
⎪
⎩⎪
⇔
−
y = 16.250
⎧
⎨
⎩
Proposed Solution:
x: Total Costs of Service Department X
y: Total Costs of Service Department Y

15. x = 15.000 + 0,08y
y = 10.545+ 0,35x
⎧
⎨
⎩
10.545 5.250 0,028y y
−⎧
⇔ ⎨
= + +⎩
⇔
−
0,972y = 15.795
⎧
⎨
⎩
⇔
x = 15.000 + 0,08×16.250
y = 16.250
⎧
⎨
⎩
⇔
−
y = 10.545+ 0,35× 15.000 + 0,8y( )
⎧
⎨
⎪
⎩⎪
⇔
x = 16.300
y = 16.250
⎧
⎨
⎩
⇔
−
y = 16.250
⎧
⎨
⎩
Proposed Solution:
x: Total Costs of Service Department X
y: Total Costs of Service Department Y

16. 2nd STEP:
Two-stage cost allocation process.
Proposed Solution:

17. Description
Production
Departments
Service Departments
Total
A B X Y
Proposed Solution:

18. Description
Production
Departments
Service Departments
Total
A B X Y
1st-Step Cost
Allocation 26.400,00 19.125,00 15.000,00 10.545,00 71.070,00
Proposed Solution:

19. Description
Production
Departments
Service Departments
Total
A B X Y
1st-Step Cost
Allocation 26.400,00 19.125,00 15.000,00 10.545,00 71.070,00
Department X (1) 7.335,00 (3) 3.260,00 (16.300,00) (5) 5.705,00
Department Y (2) 6.825,00 (4) 8.125,00 (6) 1.300,00 (16.250,00)
( )
( )
( )
1 0,45 16.300
2 0,42 16.250
3 0,20 16.300
×
×
×
4( )0,50 ×16.250
5( )0,35×16.300
6( )0,08×16.250
Proposed Solution:

20. Description
Production
Departments
Service Departments
Total
A B X Y
1st-Step Cost
Allocation 26.400,00 19.125,00 15.000,00 10.545,00 71.070,00
Department X (1) 7.335,00 (3) 3.260,00 (16.300,00) (5) 5.705,00
Department Y (2) 6.825,00 (4) 8.125,00 (6) 1.300,00 (16.250,00)
2nd-Step Cost
Allocation 40.560,00 30.510,00 0 0 71.070,00
( )
( )
( )
1 0,45 16.300
2 0,42 16.250
3 0,20 16.300
×
×
×
4( )0,50 ×16.250
5( )0,35×16.300
6( )0,08×16.250
Proposed Solution:

21. PAULINO SILVA
www.paulinosilva.com
Acknowledgements: