Skip to main content

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.

ByHoang TruongUpdated

FrameworkService department cost allocation

See it move

Loading infographic...

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.

Where it fits
SubjectCost AccountingAdvancedTopicOverhead Allocation & ABCAdvanced

The formula

LaTeX
{T1=B1+p12T2T2=B2+p21T1\begin{cases} T_{1} = B_{1} + p_{12} \cdot T_{2} \\ T_{2} = B_{2} + p_{21} \cdot T_{1} \end{cases}

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

PracticeCORE

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?

Select an answer to check your understanding.