Reciprocal method
Reciprocal method allocates service department costs by solving simultaneous equations that fully capture mutual services between support departments before distributing totals to production, making it the most theoretically accurate of.
FrameworkService department cost allocation
See it move
When support departments serve each other as well as production, the step-down method allocates their costs in one direction only, choosing a sequence and moving on. The reciprocal method instead solves simultaneous equations — T1 equals B1 plus a share of T2, and T2 equals B2 plus a share of T1 — so each department's fully loaded total reflects services received in both directions before allocation to production.
The formula
Variables
- Total cost of service department i inclusive of all inter-department services received (€)
- Budgeted (direct) cost of service department i before any inter-department allocations (€)
- Proportion of service department 2's output consumed by service department 1 (decimal)
- Proportion of service department 1's output consumed by service department 2 (decimal)
The solved T values are fully loaded departmental totals, which are then allocated to production departments in their normal usage proportions.
Check yourself
A hospital has two service departments — Facilities and Information Technology — each of which provides significant services to the other. A management accountant argues for using the reciprocal method of allocation. Which feature distinguishes this method from the step-down method?