Service department cost should be allocated to?

Question: Service department cost should be allocated to?

Service department cost is the cost incurred by the departments that provide services and support to the operating departments of an organization. Examples of service departments are human resources, information systems, maintenance, and administration. Service department cost should be allocated to the operating departments that benefit from the services, as well as to other service departments in some cases. This allocation helps to measure the full cost of the products or services, to ration the demand for internal services, and to assess the efficiency of the service departments.

There are three methods for allocating service department costs: the direct method, the step method, and the reciprocal method⁴. The direct method allocates costs to the operating departments directly, with no allocations to the other service departments. The step method allocates costs to operating departments and other service departments sequentially, but only in one direction. The reciprocal method fully recognizes the other service departments by allowing reallocations back to each service department. The choice of the method depends on the accuracy and complexity of the allocation process. The direct method is the simplest but the least accurate, while the reciprocal method is the most accurate but the most difficult to calculate. The step method is a compromise between the two extremes.

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