Service department cost allocation

Service-department cost allocation reassigns the costs of support departments — such as maintenance or IT — into production departments before product unit costs are calculated, ensuring indirect support costs eventually reach products.

ByHoang TruongUpdated June 30, 2026

FrameworkOverhead absorption

See it move

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Maintenance costs €60,000 and serves two production departments. Under the direct method, Machining — using 70 percent of maintenance's output — absorbs €42,000, and Assembly — using the remaining 30 percent — absorbs €18,000. Both figures then flow into each department's own overhead absorption rate. The direct method ignores any service maintenance provides to other service departments, which the step-down and reciprocal methods capture more precisely.

Where it fits

SubjectCost AccountingAdvancedTopicOverhead Allocation & ABCAdvanced

The formula

LaTeX

\text{Allocated Cost to Production Dept} = \frac{\text{Production dept usage}}{\text{Total production dept usage}} \times \text{Service dept total cost}

Variables

$P r o d u c t i o n d e pt u s a g e$: The volume of services consumed by one production department from the service department (—)
$T o t a l p r o d u c t i o n d e pt u s a g e$: Total services consumed by all production departments combined (excluding other service depts under the direct method) (—)
$S er v i ce d e ptt o t a l cos t$: All costs accumulated in the service department before reallocation (€)

Direct method — ignores services rendered between service departments

Check yourself

PracticeCORE

Why must the costs of service departments — such as maintenance and human resources — be allocated to production departments before calculating product unit costs?

Select an answer to check your understanding.