Reciprocal Costs

Reciprocal Costs involve the apportionment of costs between service cost centers and production cost centers in a mutually interactive manner. This ensures that the costs of support services are accurately allocated to the production activities, allowing for precise cost control and financial analysis.
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Definition

Reciprocal Costs refer to costs apportioned from a service cost center to a production cost center that also performs work for the original service cost center. This necessitates that a portion of the production cost center’s costs be re-apportioned back to the service cost center. The apportionment of these costs can be calculated either using simultaneous equations or a continuous apportionment method until all costs are appropriately charged to the production cost center.

Examples

  1. Maintenance and Production Departments: If the maintenance department (service cost center) performs repairs for the production department (production cost center), and the production department also undertakes minor maintenance tasks for the maintenance department, the costs must be reciprocally allocated.

  2. Human Resources and Manufacturing Departments: If the human resources department (service cost center) offers recruitment and training for the manufacturing department (production cost center), and the manufacturing department provides administrative support for HR activities, reciprocal costing will occur.

Frequently Asked Questions (FAQs)

Q1: Why is it necessary to re-apportion costs between service and production cost centers?

  • A1: It’s necessary to ensure that all costs are accurately accounted for, reflecting the true cost of production and the support services provided. This leads to better financial analysis and cost control.

Q2: What methods are used to calculate reciprocal costs?

  • A2: The primary methods are simultaneous equations and the continuous apportionment method.

Q3: What are the benefits of using simultaneous equations for cost apportionment?

  • A3: This method allows for precise allocation by solving a system of equations that represents all mutual services between cost centers, leading to accurate cost distribution.

Q4: Can reciprocal costing be applied to all businesses?

  • A4: While it can be applied broadly, it is most effective in complex operations with significant interdepartmental services.

  1. Service Cost Centre: A department that provides services to other departments within an organization rather than producing goods directly.

  2. Production Cost Centre: A department that directly contributes to the production of goods and services.

  3. Cost Apportionment: The process of distributing costs among various departments or cost centers.

Online References

  1. Investopedia: Cost Allocation
  2. Business Dictionary: Reciprocal Allocation
  3. MBA Skool: Cost Apportionment

Suggested Books for Further Studies

  1. “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, Madhav V. Rajan
  2. “Cost and Management Accounting” by Colin Drury
  3. “Management and Cost Accounting” by Alnoor Bhimani, Charles T. Horngren, Srikant M. Datar, George Foster

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