Direct Allocation Method

Direct allocation method is one of the four techniques used to reallocate service departments' overheads to production departments. It is different from the other reallocation methods because it completely disregards any services provided by one service department to another. This means that no portion of the overhead of a service department is reallocated to other service departments. All is reallocated to production departments in the ratio of their specified percentages.

Direct method is generally an inaccurate method of service departments' overheads reallocations and very inaccurate when service departments receive significant help from each other. Therefore it is only recommended in cases where service departments do not depend much on the services of other departments.

Direct allocation method is better explained using an example.

Example

Let us use the same problem we used earlier:

γ ltd. has three production departments (P, Q and R) and two service departments (X and Y). The overheads for the departments before reallocation are given below:

DepartmentOverheads
P$35,000
Q$64,000
R$19,000
X$22,000
Y$38,000

The reallocation percentages of the service departments' costs are given below:

DepartmentPQRXY
X40%25%25%10%
Y25%30%30%15%

Use the direct allocation method to reallocate the overheads of service departments to production departments.

Solution

First we have to calculate the factors to apportion service department overheads:

DepartmentSum of PercentagesPQR
X40+25+25=9040/9025/9025/90
Y25+30+30=8525/8530/8530/85

We then multiply the service department overhead by the above factors to obtain the amount of overhead to be allocated to each production department.

Department P Q R X Y
Allocated Overheads 35,000 64,000 19,000 22,000 38,000
Dept. X Reallocation 9,778 6,111 6,111 (22,000)
Dept. Y Reallocation 11,176 13,412 13,412 (38,000)
Total 55,954 83,523 38,523 0 0

Written by Irfanullah Jan