ADM 626 Module 5 answer 4

Allocation of costs to various departments can be done using three methods. These method vary in terms of complexity as well as the way they handle support departments. The first method used is the direct method. This is the easiest method which many people prefer using. The costs to the departments are allocated considering the relative use. This method allocates costs of the support department directly to the producing department. The main characteristic of this method is that reciprocal services are not recognized or accounted for. That means the services offered by support departments to other support departments are ignored. This method has very few computations.

The second method of cost allocation is the reciprocal method. In the reciprocal method, the services offered by support departments to other support departments are fully accounted for in the cost allocation. The method employs simultaneous equations and therefore it involves more computations compared to the direct method. In this method, the total cost of a support department is found by computing the sum of its direct costs and the allocated costs of other support departments. The total cost allocated to a department through this method would therefore be higher compared to when the direct method is used.

The third method is the sequential method. In this method the costs of support departments are allocate to the producing departments and to some support departments. This implies that the services offered by support departments to other support departments are partly recognized. Once the costs of a support department are allocated, it follows that no further allocations are made to that specific department. In my opinion, the direct method of cost allocation is the best. It is not only easy but also accurate. The computation of costs associated with support services may sometimes be complex and of negligible effect.