Cost of Allocation Method, Direct Allocation Method

Cost Allocation
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Introduction
For any business or organization, keeping track of all the costs is a fundamental requirement for making profits or at least, establishing a margin between income and expenses. Monitoring costs is as essential as it also helps establish the steps to be taken to ensure maximum profits. This is done through cost allocation procedures. There are various methods of cost allocation in use today. These include the direct, step down, as well as the reciprocal method. These methods not only help in ensuring that an organization’s operations are effective, but also efficient. This paper delves into the discussion of these methods, while also providing applications of the same when it comes to a healthcare institution.
* Direct Allocation Method.
In this method, the costs accrued by the service department are effectively distributed to the production department. This method however, strictly specifies the distribution of costs, but doesn’t entail the subsequent distribution of services in a similar manner. There is a clear procedure in which the costs are distributed to the other department, mainly based on the link between the service and the subsequent result in the production department. It has a general disregard to self-service and reciprocal services(Cleverly,2017). It is the most widely used cost allocation method, even though it also has a lot of inaccuracies.
* Step Down Method.
Just like the direct allocation method, this one also disregards self-services, but recognizes reciprocal services. This method is also known as the reciprocal method due to the fact that it classifies the departments based on the importance of the services they do. As a result, those that serve more department are taken as first. In this method, some services are indeed assigned to other departments. When it c...