Reciprocal Method for Allocating Support Costs (SHORTCUT USING LINEAR EQUATIONS)

This video shows how to use the Reciprocal Method allocate the costs of multiple support departments when the support departments provide services to each other. A shortcut for determining the amounts to be allocated is to set up a system of linear equations and solve for the amounts to be allocated from each support division (this amount will always be higher than the pre-allocation costs of each support division, because the pre-allocation amounts don't take into consideration the fact that a support department received services from another support department). A comprehensive example is provided to show how to set up the system of equations, solve the equations, and then use the results to allocate the costs appropriately.
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[@Bookofshavings]

For those who are using excel and want a formula that uses 1 cell: adjusted S1= ([S1 value] + [S2 value]*[% of S2 allocated to S1])/1-[% of S2 allocated to S1]*[% of S1 allocated to S2] adjusted S2 = ([S2 value] + [S1 value]*[% of S1 allocated to S2] )/1-[% of S2 allocated to S1]*[% of S1 allocated to S2] Notice the percentages that divide on the bottom don't change, but the percentages and values on the other parts use the "reciprocal" of each other i.e they flip. Best of luck cost accounting students :)

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[@magicatlas8375]

Is this the fastest way?

[@ashiwinisrinivas4899]

How did we get that 0.95

[@BoshraUSA]

I would like to thank you for your great and awesome videos. I have a question You said the total cost of running both HR and Admin dept is ( $ 30,000, 40,000 ) respectively, but after calculating the cost rendered to each of service dept by each other, the total cost of both HR and Admin dept will be 48421+42105 = 90,526 Can you explain why it is higher than the real cost incurred ?

[@geoffreycosentino1165]

The last row of hours for HR and Admin represent costs between the two Support Departments and are not allocated to the product departments directly, using this method. They essentially cancel each other out. If you remove those costs from your total of 90526 (90526-8421-12105), it will give you the costs that are allocated --> 70 000

[@ambitoiusheart]

Geoffrey Cosentino thank u. Got it

[@roynotintown]

Geoffrey Cosentino Somewhere I am still not convinced don't you think that it is (70000+12105-8421) = 73684 to be allocated to production departments as 8421 gets knocked off from 12105 and the balance adds to the unabsorbed cost i.e 3684 (12105 - 8421)

[@jasminet89]

@@geoffreycosentino1165 thank you so much for this explanation!

[@abcsofuncoveringtruth9681]

An easier way to look at it is to set up a Table, Remember its looking at how the costs are allocated across the different departments, by adjusting the costs from 30000 & 40000 to 42105 & 48421 respectively we already took into consideration the allocation between support departments therefore the only departments to look at again is Production Mountaineering Kayaking Costs allocated by HR (12/20)*42105 = 25263 (4/20)*42105 = 8421 Costs Allocated by Admin (15/40)*48421 = 18158 (15/40)*48421 - 18158 TOTAL 43,421 26579 =70,000 Hope this helps

[@shankare2286]

Wish me luck. I have a CPA BEC Exam on Jul 12th 2023, Dang! 😬😬

[@jamiesalih7883]

Is it possible to allocate three support divisions using recip method? Can you help with the algebra on this?

[@Bookofshavings]

uses matrix's maths

[@phoenixkool]

Wait how did you allocate more than you have? Pls Explain

[@cmcmmcmc]

not the most timely reply but, it is due to the allocation from the other support group and vice versa happening simultaneously in the solution, I.E. if you look at the set up there are cost hours going from HR to the Admin and back from Admin to HR, These "increase" the total allocation.

[@abcsofuncoveringtruth9681]

An easier way to look at it is to set up a Table, Remember its looking at how the costs are allocated across the different departments, by adjusting the costs from 30000 & 40000 to 42105 & 48421 respectively we already took into consideration the allocation between support departments therefore the only departments to look at again is Production Mountaineering Kayaking Costs allocated by HR (12/20)*42105 = 25263 (4/20)*42105 = 8421 Costs Allocated by Admin (15/40)*48421 = 18158 (15/40)*48421 - 18158 TOTAL 43,421 26579 =70,000 Hope this helps

[@salnjoycelascari3775]

@@cmcmmcmc how would this increase the total costs of $70,000 ? You’re literally taking the 70K total support department costs and allocating to each support department appropriately. Makes no sense that there would be an additional 20,000 in costs incurred just because you allocated the total original costs. If you take some of the HR cost and allocate it to admin then, it doesn’t mean you’re increasing costs. You’re simply taking away from one support department and adding it to the other. Can you please explain?

[@yurain1972]

What if you have three departments?

[@rolandorivera8535]

yu Rain i kill myself hahaha

[@Jenny-iz2fn]

yu Rain you can then calculate with Matrix

[@jamiesalih7883]

@@Jenny-iz2fn Did you ever figure out the answer to this?

[@frankta4308]

how do you get 20?

[@BlueFirePS3]

12000/20000 is the same as 12/20

[@laughernine4320]

I'm so confused. What was the point of the equations if we again allocated costs back to the support departments? The way I understand it, the goal was to somehow allocate $70,000 of the support costs to the operating departments. I don't see how that was done. :(

[@Frederico_El_Padrino]

That would be the Direct Method. As the presenter said, (paraphrase) this method is for allocating to not only the operating divisions, but to reciprocate between the support departments - because they utilize each other's time & services too. I had to watch it a few times plus the othe video on the long version (a couple times).

[@abcsofuncoveringtruth9681]

An easier way to look at it is to set up a Table, Remember its looking at how the costs are allocated across the different departments, by adjusting the costs from 30000 & 40000 to 42105 & 48421 respectively we already took into consideration the allocation between support departments therefore the only departments to look at again is Production Mountaineering Kayaking Costs allocated by HR (12/20)*42105 = 25263 (4/20)*42105 = 8421 Costs Allocated by Admin (15/40)*48421 = 18158 (15/40)*48421 - 18158 TOTAL 43,421 26579 =70,000 Hope this helps

[@moviemadnizz]

Your Formula is not correct. It does not allocate the costs allocated to A (by H) back to H. This formula does not fit the reciprocal method you explained in your last video, this formula does less steps. I know math is hard... a doctor explained this to me, Thanks Doctor