Service department costs are reapportioned to operating departments, since service departments do not carry out production directly but support it.
Reapportionment Basis
- Purchase department
Number of purchase orders, or value of materials purchased for each production department. - Stores
Value or quantity of materials issued, or number of materials requisitions. - Internal transport
Weight and distance. - Inspection
Inspection hours devoted to each department.
Methods
Direct Method
Costs of service departments are apportioned directly to production departments, without considering any service from one service department to another. Proper apportionment cannot be done, so production departments may be overcharged or undercharged.
Good when service departments do not provide service to other service departments.
Step Down Method
Best used where some service cost centres provide services to other service cost centres, but these services are not reciprocated.
Reciprocal Method
Used where service departments provide services to each other reciprocally.
Simultaneous Equation Method
Sets up the overhead reapportionment process as a set of equations, letting be the total overhead apportioned to department , the total overhead apportioned to department , and so on.
Repeated Distribution Method
Each service department’s total cost is repeatedly reallocated among other departments, based on a given percentage basis, until the cost of each service department becomes negligible.