Quiz 17: Allocation of Support Activity Costs and Joint Costs

Business

Servicing department for an organization provided services to the customers also to organization. This service department do not directly engaged in the production activity but supports production activities or production departments. In contrast, production department on the other hand directly engages in the production process of the company. Distinguish between service department and production department is the directly and indirectly involves in production activities. Accepting deposits from customers as an input and use this input to provide loans to the needy and generating revenue with the interest revenue on loan provided as an output. Apart from accepting customer deposits, a bank does many activities behalf of his customer and charges customer for every service bank provides as bank charges.

Reciprocal Services : The relationship that exists between the service departments due to mutual provision of services to each other is called Reciprocal Service.

Differences between the direct step-down and reciprocal-services method : The Direct Method, Step down method and Reciprocal Services method are three different method of allocating the Service Department Costs to the Production departments. Direct Method: In the Direct Method, each Service Department's costs are directly allocated to the Production Department. The direct method ignores the fact that some service department provides services other service departments. Step down Method: The shortcoming of the Direct Method described above is partly overcome by the Step down Method. This method allocates the cost of some service departments to other service departments. However, once a Service Department's costs have been allocated, no subsequent costs are allocated back to it. Reciprocal Method: The reciprocal method is the most accurate of the three methods for allocating service department costs, because it recognizes reciprocal services among service departments. This method however is quite complex and involves the understanding the concept of Simultaneous equations.