Methods of Cost Re-apportionment: Direct Method, Step-ladder Method, Repeated Distribution Method, Simultaneous Equation Method

16/10/2022 0 By indiafreenotes

(i) Direct Re-Distribution Method:

Under this method, the costs of service departments are directly apportioned to production departments without taking into consideration any service from one service department to another service department. Thus, proper apportionment cannot be done and the production departments may either be overcharged or undercharged. The share of each service department cannot be ascertained accurately for control purposes. Budget for each department cannot be prepared thoroughly. Therefore, Department Overhead rates cannot be ascertained correctly.

(ii) Step Distribution Method:

Under this method the cost of most serviceable department is first apportioned to other service departments and production departments. The next service department is taken up and its cost is apportioned and this process goes on till the cost of the last service department is apportioned. Thus, the cost of last service department is apportioned only to the production departments.

(iii) Reciprocal Services Method:

In order to avoid the limitation of Step Method, this method is adopted. This method recognizes the fact that if a given department receives service from another department, the department receiving such service should be charged. If two departments provide service to each other, each department should be charged for the cost of services rendered by the other.

There are three methods available for dealing with inter-service departmental transfer;

(a) Simultaneous Equation Method,

(b) Repeated Distribution Method and

(c) Trial and Error Method.

(a) Simultaneous Equation Method:

Under this method, the true cost of the service departments are ascertained first with the help of simultaneous equations; these are then redistributed to production departments on the basis of given percentage. This method is preferable and is widely used even if the number of service departments are more than two. Due to the availability of computer it is not difficult to solve sets of simultaneous equations. Following illustration may be taken to discuss the application of this method.

Inter-Service Departmental Mutual Allocation System (Simultaneous Equation Method):

The method given above assumes that service is rendered by say, Repairs and Maintenance department to the Power House but not by the latter to the former. This assumption is not valid since service departments not only render service to production departments but also mutually. This fact should be considered while apportioning expenses.