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:

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

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:

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

by Irfanullah Jan, ACCA and last modified on Apr 16, 2013