Repeated Distribution Method
Repeated distribution method is a cost accounting technique in which costs of each service department are repeatedly allocated to production departments according to reasonable percentages until the balance left in service departments columns reaches zero.
The need to allocate service department costs to other departments arises due to the fact that service departments are not profit centers on their own. In order to better appraise the performance of departments, the costs incurred by service departments are allocated to profit earning divisions on a reasonable basis.
Where non of the service departments benefit from other service departments, the cost allocation is straight forward. However, if service departments use services of other service departments, the cost allocation gets a bit complicated. There are a number of techniques which may be used for this process and repeated distribution method is one of them.
Assume a company has a certain number of production departments and two service departments, A and B, which benefit from each other. In order to reallocate the service department costs to production departments using repeated distribution method, we follow the steps given below:
- Start by allocating the higher service cost first, let it be A.
- Allocate department B's costs to all production departments and department A.
- Since the balance in department A no longer remains zero after reallocation of department B's cost, we have to repeat the process by allocating department A's cost again to production departments and department B.
- This process of reallocating the service department costs is repeated until the balance remaining in any service department becomes negligible.
The following example illustrates the repeated distribution method:
γ ltd. has three production departments (P, Q and R) and two service departments (X and Y). The total overheads for the departments are given below:
The reallocation percentages of the service departments' costs are given below:
Reallocate the service department costs in the specified percentages using repeated distribution method.
|Dept. X Reallocation||4,400||5,500||5,500||(22,000)||2,200|
|Dept. Y Reallocation||10,050||12,060||12,060||6,030||(40,200)|
|Dept. X Reallocation||1,206||1,508||1,508||(6,030)||603|
|Dept. Y Reallocation||151||181||181||90||(603)|
|Dept. X Reallocation||18||23||23||(90)||9|
|Dept. Y Reallocation||2||3||3||1||(9)|
We stop when the balance left in service departments becomes negligible.
While repeated distribution method is simple to understand, it is time consuming and better faster techniques are available such as simultaneous equation method.
by Irfanullah Jan, ACCA and last modified on