3 methods of allocating service department costs to producing departments are;
- Direct Method.
- Step Method.
- Algebraic Method.
The direct method is the most widely used. This method ignores any service rendered by one service department to another, and it allocates each service department’s total cost directly to the producing departments.
Step method sometimes called a sequential method of allocation. This method recognizes services rendered by the service department to another service department and is more complicated because it requires a sequence of allocation.
The sequence typically starts with the department that renders service to the greatest number of other service departments and ends with the department that renders service to the least number of other departments.
Once a service department’s cost has been allocated, no subsequent service department cost is allocated to it.
An algebraic method sometimes called the reciprocal method. This method allocates cost by explicitly including the mutual services rendered among all departments, causes of under and over absorption of overhead.