Overheads of service departments

Service departments are those which are not engaged in production of any specific items but provide support to production department e.g. stores department, repairs and maintenance department, personnel department etc

The overheads charged to service department must further be reappointed to the production departments. This is called, secondary distribution of overhead or reappointment of service department overheads.

Methods of reappointment of service department overheads There are main methods include

i. Repeated distribution method (continuous allocation method)
ii. Algebraic method (simultaneous equation method)
iii. Direct allocation method
iv. Sequential allocation method

 

Repeated distribution method

Under this method the overheads of the service department are transferred to the production department on the basis of the benefit that the production department enjoys from these service departments. The process of transferring the overheads can begin allocating the overheads of one service department to other production departments before proceeding to the next service department and so on. If the service departments are engaged in reciprocal relationships i.e. service departments provides services to one another, then in the process of reallocating the overheads of any given service department, some overhead cost is transferred to a previously closed service department and the process has to begin all over again.

 

Algebraic/simultaneous method

This method transfers the overheads of service departments modeling the problem into a system of simultaneous equations and solving it using any of the conventional methods.

Direct allocation method
Under this method overheads of the service departments are transferred to the production department on the basis of the benefit that the production departments enjoy from a particular service department. In this method, no overhead is allocated to another service department even if it enjoys the services of any given service department. Therefore the basis of transferring the overheads is the ratio formed in the production department only with respect to benefits enjoyed.

Sequential allocation/ step down method
Under this method, the service departments are ranked in a descending order on the basis of the total amount of the benefits they offer to other departments. The overhead cost of the service departments that give the highest amounts of services is allocated first to the other (departments including other service department).
The service department that gives the second highest amount of service then reallocated to the other departments but nothing is reallocated back to the first service department even if it enjoys the benefits. The process continues until all the overheads of the service department have been reallocated.

 

Overheads of service departments

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