Direct allocation method

The direct allocation method assigns each service department's cost straight to production departments only, based on their share of the department's activity, ignoring services provided between service departments themselves.

ByHoang TruongUpdated July 5, 2026

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The direct allocation method splits a service department's cost only among production departments, ignoring any service department using another. Draycott Manufacturing's €72,000 Maintenance cost is split by machine hours: Assembly, with 4,000 hours, gets €48,000, and Finishing, with 2,000 hours, gets €24,000. Quality Control gets nothing, even though Maintenance helped it too.

Where it fits

SubjectCost AccountingCoreTopicOverhead Allocation & ABCCore

The formula

LaTeX

C_X = SC \times \dfrac{U_X}{\sum U}

Variables

$C_{X}$: Cost allocated to production department X (€)
$S C$: Total cost of the service department (€)
$U_{X}$: Usage of the service by production department X (hours)
$\sum U$: Total usage of the service by all production departments (hours)

Service-department usage by other service departments is excluded from the denominator under the direct method.

Check yourself

PracticeCORE

Halverson Plastics has one service department, Stores, with total cost €90,000 for the month. Stores also provided 1,000 hours of support to Engineering, the other service department, but Halverson uses the direct allocation method. Machine hours used by the two production departments are Moulding 3,000 hours and Trimming 6,000 hours. How much Stores cost is allocated to Trimming?

Select an answer to check your understanding.