The services of support units can be distributed using three methods: direct, incremental, and the method of distribution of mutual branches. The costs of the service departments are shared between the operations ones because they exist to support them. Maintenance divisions help several production departments simultaneously, and accountants must allocate for all these costs. There are a number of approaches of varying degrees of complexity for such tasks.
The direct method is the most widely used. According to this method, the costs of each non-operational department are sequentially distributed only among the production divisions. Its main advantages are relative simplicity and speed since the number of operations on secondary distribution is limited by the number of maintenance units.
The stepwise method is used to allocate counter services to maintenance units and is more accurate than the direct method. The value of utilities of each compartment is distributed between both the production and maintenance branches. At the same time, no subsequent redistribution of resources is expected. The non-operational department that incurs the highest expenses is usually the first to close and provides the highest value of maintenance.
The standard distribution method is also used to allocate counter attendance to maintenance units and is considered more accurate than the incremental method. It involves the accumulation by each handling department of the costs of other departments whose utilities it consumes.
Then these costs should be redistributed. As this process can continue for a long time, the method is the most time-consuming. Such additional labor costs, in most cases, do not justify the results since the differences in overhead costs calculated based on the two above methods are usually minimal. Naturally, in practice, computers are used to distribute mutual services.
There are two main ways to allocate mutual services: the re-allocation method and the system of equations method. The first approach assumes the distribution of the costs of each service unit in a certain percentage until the value of the costs becomes minor, so their further distribution will not be appropriate. The system of equations method involves using a system of linear equations. The data obtained by both methods must match.
For instance, the company has two production units (A and B) and two service divisions: a warehouse and a repair shop. Assume that $2,000 of inspection costs are for the warehouse and $1,000 for the repair shop.
These expenses can be allocated to other departments in proportion to the value of equipment, and warehouse resources are allocated based on the cost of materials issued. If, for example, the equipment is related in a ratio of 3:2, then the cost of warehouse control is divided by five and multiplied according to the share of the production unit. Such calculations are carried out with the direct method.
With the step-by-step approach, the shop or warehouse under consideration is taken into account in proportion, service units are included in the calculations, and the expense is also distributed among them. For example, if the ratio with the repair shop in terms of materials issued was 6:4:1 for two production departments and the repair branch, respectively, then $1,000 would be divided by ten and multiplied by the share of each division submitted.