Example of Methods of Allocating Service Costs
Suppose the following data:
|
User department
|
Unit of Service Provided
|
Costs Prior to Service Department
|
|
|
S1
|
S2
|
S3
|
Shs.
|
|
S1
|
0
|
2,000
|
4,500
|
92,400
|
|
S2
|
1,000
|
0
|
0
|
184,800
|
|
S3
|
2,000
|
4,000
|
0
|
138,600
|
|
P1
|
4,000
|
10,000
|
1,500
|
400,000
|
|
P2
|
3,000
|
4,000
|
9,000
|
500,000
|
|
Totals
|
10,000
|
20,000
|
15,000
|
1,315,800
|
Direct method
|
|
S1
|
S2
|
S3
|
P1
|
P2
|
TOTAL
|
|
Cost Prior to Allocation
|
92,000
|
184,800
|
138,600
|
400,000
|
500,000
|
|
|
Allocate S1(4:3)
|
(92,400)
|
-
|
-
|
52,800
|
39,600
|
|
|
Allocate S2 (5:2)
|
-
|
(184,800)
|
-
|
132,000
|
52,800
|
|
|
Allocate S3(1:6)
|
-
|
-
|
(138,600)
|
19,800
|
118,800
|
|
|
|
-
|
-
|
-
|
604,600
|
711.200
|
|
|
|
|
|
|
|
|
1,315,800
|
Step-wise Method
|
|
S1
|
S2
|
S3
|
P1
|
P2
|
TOTAL
|
|
Cost Prior to Allocation
|
92,000
|
184,800
|
138,600
|
400,000
|
500,000
|
|
|
Allocate S1(1:2:4:3)
|
92,400
|
9,240
|
18,480
|
36,960
|
27,720
|
|
|
|
|
194,040
|
157,080
|
436,960
|
527,720
|
|
|
Allocate S2(2:5:3)
|
|
(194,040)
|
43,120
|
107,800
|
43,120
|
|
|
|
|
-
|
200,200
|
544,760
|
570,840
|
|
|
Allocate S3(1:6)
|
|
|
(200,200)
|
28,600
|
171,600
|
|
|
|
|
|
-
|
573,360
|
742,440
|
|
|
|
|
|
|
|
|
1,315,800
|
Reciprocal Method
Let Sa represent the net costs of service dept 1
Let Sb represent the net costs of service dept 2
Let Sc represent the net costs of service dept 3
Sa = 92,400 + 0.15b + 0.3 Sc--------------------------Eq(i)
Sb = 184,800 + 0.1 Sa ----------------------------------Eq(ii)
Sc = 138,600 + 0.2 Sa + 0.2 Sb----------------------Eq(iii)
After substituting Equation (iii) into Equation (i) and solving, then we get;
Sa = 92,400 + 0.1 (184,800 + 0.1 Sa) + 0.35c
Sa = 92,400 + 18,480 + 0.01 Sa + 0.3Sc
0.99 Sa = 110,880 + 0.3Sc--------------------------Eq(iv)
After substituting Equation (ii) into Equation (iii) and solving, then we get,
Sc = 138,600 + 0.2Sa + 0.2 (184,800 + 0.1Sa)
Sc = 138,600 + 0.2Sa + 0.22Sc--------------------------Eq(v)
After substituting (v) into Eq(iv) and solving then we get,
0.99Sa = 110,880 + 0.3 (175,560 + 0.22Sa),
0.99Sa = 163,548 + 0.066 Sa
0.924Sa = 163,548
Sa = 163,548= 177,000
Consequently Sb = 184,800 + 0.1 (Sa) = 184,800 + 0.1(177,000) = Shs.202, 500
Sc = 138,600 + 0.2(177,000) + 0.2(202,500) = Shs.214, 500
|
|
S1
|
S2
|
S3
|
P1
|
P2
|
|
Costs before allocation
|
92,400
|
184,800
|
138,600
|
400,000
|
500,000
|
|
Costs after recognition
|
177,000
|
202,500
|
214,500
|
|
|
|
Allocate costs S1(1:2:4:3)
|
(177,000)
|
17,700
|
35,400
|
70,800
|
53,100
|
|
Allocate S2 (2:4:10:4)
|
20,250
|
(202,500)
|
40,500
|
101,250
|
40,500
|
|
AllocateS3 (3:1:6)
|
64,350
|
-
|
(214,500)
|
21,450
|
128,700
|
|
|
-
|
-
|
-
|
593,500
|
722,300
|