How do you compute allocation rates for common costs?

In the previous examples, we assumed support departments (e.g. human resources and maintenance) did not provide services to themselves and to each other. This is however a drastic simplification. For instance both HR and maintenance employ people and thus both use HR services, and both HR and maintenance use facilities and equipment thus both use maintenance services. In costing, self-services can and must always be ignored, but the question remains of what to do with reciprocal services: can we ignore them or we take them into account?

Self-services are services provided by a support department to itself (e.g. HR has personnel, so HR uses its own services)

Reciprocal services are services provided by different support departments to each other.

In the next pages, I will present and discuss three approaches making different choices about how to deal with reciprocal services, from the simplest and least accurate to the most complex and most accurate: the direct allocation method, the sequential (or step-down) allocation method, and finally the reciprocal allocation method. You can get all the data and solutions by downloading this Excel file.