Reapportionment of service cost centre costs

There are three main methods of re-apportioning service cost centre costs

Under absorption costing method, when calculating unit costs, each cost unit is charged with its direct costs (usually refers to direct material, direct labour) and an appropriate share of the organization’s total overheads (indirect costs). An appropriate share means an amount that reflects the time and effort that has gone into producing the cost unit.

Service cost centres are those that exist to provide services to other cost centres in the organisation. They do not work directly on producing the final product. Consequently, their costs must be re-apportioned to production cost centres so that their overheads can be absorbed into the final product.

The direct method

This is the simplest method and is ideal to use when service cost centres provide services to production cost centres, but not to each other.

The step down method

This approach is best used where some service cost centres provide services to other service cost centres, but these services are not reciprocated. In these circumstances the costs of the service cost centre that serves most other service cost centres should be reapportioned first. We then ‘step down’ to the service cost centre that provides the second most service, and so on.

The reciprocal method

This approach is used where some service cost centres provide services to other service cost centres, and the service is reciprocated. In reality, an organization may choose to ignore this reciprocal service and re-apportion overheads by using the direct or step down approach.

In exam, the examiner will indicate that he wants you to use one or either of these methods by asking for a method that ‘fully reflects the reciprocal services involved’.