Repeated Distribution Method, Concepts, Objectives, Features, Advantages and Limitations

Repeated Distribution Method (also known as the Step Method) involves repeatedly distributing service department costs to other departments, including other service departments, based on the percentage of services rendered. This process continues until the balance of service department overheads becomes negligible.

Under this method, the overheads of one service department are distributed to other departments according to predetermined ratios. After redistribution, the next service department’s costs are distributed, and the process is repeated. This continues until all service department costs are transferred to production departments.

Objectives of Repeated Distribution Method

Repeated Distribution Method (also called the Step Ladder or Iterative Method) is used in secondary overhead distribution to allocate service department costs to production departments. This method involves repeatedly redistributing service department costs until balances become negligible.

• Accurate Redistribution of Service Costs

The primary objective of the repeated distribution method is to redistribute service department costs accurately among production departments. It ensures that all costs incurred by service departments, including partial services rendered to other service departments, are fairly transferred. By doing so, production departments carry a true share of indirect costs, which leads to more precise product costing and better financial analysis.

• Recognition of Inter-Service Department Services

This method acknowledges that service departments often provide services to one another. By repeatedly distributing costs, the method accounts for inter-departmental services, ensuring that each production department absorbs not only direct service costs but also the portion of costs passed through other service departments. This recognition improves the fairness and accuracy of overhead allocation.

• Foundation for Overhead Absorption

The repeated distribution method provides a correct total of production department overheads. These totals are used as a basis for absorption into cost units. Accurate absorption ensures that product costs include a fair share of all indirect expenses, which is essential for reliable pricing and profitability analysis.

• Cost Control and Monitoring

By redistributing service department costs, management can monitor the total overhead burden of production departments. Identifying the full extent of service costs helps control unnecessary expenditures, track departmental efficiency, and implement corrective measures to minimize wastage or overuse of resources.

• Facilitates Managerial Decision-Making

Accurate redistribution of service costs provides management with reliable data for decision-making. It supports decisions related to pricing, budgeting, resource allocation, and performance evaluation. Managers can analyze cost behavior, identify high-cost areas, and take informed steps to optimize production and overhead utilization.

• Ensures Fairness in Cost Distribution

The repeated distribution method ensures fairness by allocating service department costs to production departments in proportion to actual services rendered. This prevents arbitrary or unequal charging and ensures that each production department bears an equitable share of service overheads, promoting transparency and accountability.

• Simplifies Complex Service Relationships

In organizations with multiple service departments, the repeated distribution method simplifies the complex inter-service relationships by iteratively redistributing costs until balances are negligible. This approach avoids complex algebraic equations while still recognizing reciprocal services to a reasonable degree of accuracy.

• Provides Approximate Accuracy

Although not as precise as the simultaneous equation method, the repeated distribution method offers a practical balance between accuracy and simplicity. It provides sufficiently accurate results for most practical purposes, ensuring that overheads are fairly charged to production departments and facilitating effective cost accounting.

Features of Repeated Distribution Method

• Stepwise Redistribution

The method redistributes service department costs step by step, including costs passed to other service departments. Redistribution continues iteratively until balances of service departments become negligible, ensuring that production departments ultimately bear all indirect costs.

• Partial Recognition of Reciprocal Services

Unlike the simultaneous equation method, repeated distribution recognizes inter-service department services partially. Each redistribution accounts for a portion of costs transferred among service departments, improving fairness and accuracy in allocation.

• Basis of Distribution

Service department costs are distributed based on suitable bases, such as machine hours, labour hours, number of employees, or services rendered. The choice of basis ensures costs are apportioned proportionately to the benefit received by each department.

• Sequential Application

The method follows a predetermined sequence for distributing service department costs. A department is chosen, its costs are distributed, and then the next department is considered. This sequence continues until all overheads are allocated to production departments.

• Iterative Process

Redistribution is repeated multiple times to account for remaining balances in service departments. Each iteration brings the costs closer to their final distribution among production departments, ensuring a reasonable level of accuracy.

• Approximate Accuracy

The repeated distribution method provides an approximation of service department costs allocated to production departments. While not as precise as simultaneous equation methods, it is sufficiently accurate for practical purposes and decision-making.

• Suitable for Medium Complexity Organizations

The method is ideal for organizations with a moderate number of service departments. It balances simplicity and accuracy, making it less complex than algebraic methods yet more reliable than the direct distribution method.

• Supports Departmental Accountability

By redistributing costs, the method enables management to track service usage by production departments. This enhances departmental accountability, encourages efficient utilization of resources, and facilitates performance evaluation.

Advantages of Repeated Distribution Method

• Recognition of Inter-Service Department Services

This method partially recognizes services rendered by one service department to another. Unlike the direct distribution method, which ignores such relationships, repeated distribution ensures that production departments carry a fair share of all service department costs, including indirect inter-service department costs. This improves the accuracy and fairness of overhead allocation.

• Simplicity Compared to Simultaneous Equation Method

The repeated distribution method is simpler to apply than the simultaneous equation method. It does not require complex algebraic calculations, making it more practical for organizations with limited mathematical expertise while still providing reasonably accurate results.

• Better Accuracy than Direct Method

By redistributing service department costs multiple times, the method provides more accurate results than the direct method, which ignores inter-service department services. This ensures a closer approximation of actual overhead consumption by production departments.

• Flexibility in Application

The method can be applied to organizations with multiple service departments of varying sizes. It allows stepwise redistribution in any convenient order, making it adaptable to different industrial setups and departmental structures.

• Practical for Medium Complexity Organizations

For companies with moderate inter-service relationships, the repeated distribution method balances simplicity and accuracy. It is particularly suitable where fully precise methods like simultaneous equations may be unnecessarily complicated or time-consuming.

• Helps in Cost Control

By redistributing service department costs, management can monitor production department overheads more effectively. It identifies departments consuming excessive services, enabling better control and resource optimization, leading to cost reduction.

• Supports Managerial Decision-Making

The method provides reliable departmental overhead data that aids managerial decisions, including pricing, budgeting, outsourcing, and performance evaluation. Managers can analyze costs more accurately and take corrective actions where necessary.

• Encourages Fair Cost Allocation

Repeated redistribution ensures that overhead costs are allocated proportionally to the benefits received by each production department. This encourages fairness and accountability, promoting a transparent approach to departmental cost management.

Limitations of Repeated Distribution Method

• Time-Consuming

The method involves multiple iterations of redistributing service department costs until balances are negligible. This can be time-consuming, especially in organizations with many service departments and complex inter-service relationships.

• Approximate Accuracy

Although more accurate than the direct method, repeated distribution does not fully recognize reciprocal services. As a result, the final figures are approximate and may slightly deviate from actual overhead usage.

• Complex for Many Departments

In organizations with numerous service departments, the method becomes cumbersome. Repeated calculations can be tedious and prone to manual errors, making it challenging to maintain accuracy.

• Requires Knowledge of Service Proportions

To distribute costs accurately, management must know the proportion of services each department provides to others. Estimating these proportions can be difficult and may lead to inaccuracies if incorrect assumptions are made.

• Partial Recognition of Inter-Service Costs

The method only partially accounts for inter-service department services. It may ignore minor interactions, resulting in slight misallocation of costs to production departments.

• Not Fully Mathematical

Unlike the simultaneous equation method, repeated distribution does not offer fully precise mathematical solutions. It provides reasonable estimates but cannot ensure complete accuracy in highly complex setups.

• Difficult to Automate

In the absence of proper software, repeated iterations can be cumbersome to perform manually. Automation requires specialized tools, which may not be available in all organizations.

• May Require Multiple Trials

To achieve acceptable approximation, the distribution may need several iterations. This increases the workload and can delay the completion of cost statements or reports.