Question

Which method of cost allocation is better?

Answer 1

There are three methods of cost allocation

1. Direct method - in this method costs of service department are directly allocated to production department.

2. Step down method - in this method cost of one service department is allocated to all other services and production department. In each allocation the service department whose cost is already allocated will be ignored.

3. Reciprocal methods - in this method , equations are made based in the distribution and then allocation is done.

The best method is reciprocal method because even though this method is most complex , it gives most accurate allocation of costs.