Methods of Allocating Service Costs
Direct Method
The service costs are merely allocated to the production department according to the usage of the services given.
Step-wise Method
Several of the costs of the reciprocal services will be recognized though only to several extent. The steps followed involved:
1. Select one of the service departments and allocate its costs to all the other departments including the other service departments. Generally the basis of choosing which service department to start along with is the service department such provides services to the greatest number of another department.
2. Another service department is selected and its net costs allocated the remaining departments excluding the first service departments.
3. Repeat the process till the entire service department costs have been allocated to the production departments.
Reciprocal Method
This method totally considers all reciprocal services. It is the main precise in technically finished method. These methods employ the following techniques as:
i. Simultaneous Equation
ii. Matrix Algebra