An allotment is a process utilized to measure the cost in the production departments to evaluate and measure the values of different commodities utilized in the manufacturing process. Besides, the cost allotment process also applied in evaluating the returns (profits) of a manufacturing firm thorough the evaluation of both the production and service cost centers. This paper thus will evaluate the various methods of cost allocations over departments which are composed of: the direct method, Step method, Reciprocal method, and the step method allocation as well as calculations based on the costing system.
Direct method
This method is the simplest of all as it only charges the service costs to production without making distributions among the supporting service units. This method does not take into account the amount of work done by a service section for other service departments or even it. However, the direct method is well known to allocate costs to the support service sections, based on the corresponding total amount allocations in different production sections as argued by (James, 2002).
Reciprocal Method
This technique does not assume support services costs as they are generally assumed by both direct and the step methods of cost allocation. This method tends to recognize and allocate the costs by any support service unit. Besides, it reflects on the actual processes that are exchanged within a firm system thus termed as the most accurate method of apportionment (Togo, 2014).
Step Down Method allocation
This technique of cost apportionment, allocates support service sections costs in an ordered, sequential steps to the production departments. There is a ranking of the support service unit, by the proportions of their total distributions bases in other support service units; from the most general support unit to the least general support service unit; until all the support services are apportioned as argued by (Yukcu & Ozkaya, 2012).
This part investigates the case of the vice president of ADBI bank, who was interested in investigating the efficiency of the bank operations through checking on how ADBI handles its banking cost operations in comparison with other banks. Despite ADBI bank maintaining proper records of wages and other costs, the vice president unveils that the bank has not put any efforts to indicate how costs are linked with the various services that his bank offered.
In this case, then the vice president of ADBI asked me to assist in investigating the cost of opening an account, the cost of processing withdraws and deposits, and the cost of processing the customers’ other transactions. Based on the delegated role the ADBI generates some data as per 2019 at one of its branches (Deerfield), which is instrumental for the cost unit investigation. The data that was submitted by the Deerfield branch include; the teller wage, which amounted to 160, 000 Dhs, assistant branch manager salary, which amounted to 95,000 Dhs, and the branch manager salary, 80,000 Dhs all summing to 335, 000 Dhs.
Besides, the data concerning the transactions that prevailed within the branch during the year was also submitted which includes: opening accounts, that summed to 500 new opened accounts, processing deposits and withdraws amounting to 100,000 and processing of other customers’ transactions which totaled to 5000. Again, the lowest costs which were reported by ADBI other branches for the listed activities were as follows: opening a new account, this amounted to 26.75 per new account, processing deposits and withdraws which was 1.24 per deposit and withdraw, and 11.86 per customer transaction.
In finding the KPI values, there were considerations of total overhead costs which were calculated as followed:
- Opening accounts: 500 opened accounts* 26.75 per new account= 13,327.
- Processing deposits and withdraws: 100,000 deposits and withdraws*1.24 per deposit and withdraw= 124,000.
- Processing other customer transactions: 5000 other customers transactions * 11.86 per customer transaction= 59,300.
Filling up the table with my assumed percentages values together with the KPIs values the activity rates calculations for the activity based costing system was as follows:
Based on the found KCI values, the following were some of the suggestions that were proposed to the Deerfield operations regarding their performance:
Checking the KCI value, there was a kind of correlation between processing deposits and withdraws, with that of processing of other transactions indicating a proper distribution of resources between the two sections. This was unlike in the opening account section, which seemed to be relatively higher, predicting higher deviations that ought to be corrected for effective operations. Investigating the overall value, achieved as 335,000/196,675=1.7, indicates an agreement with the processing of other transaction units and thus should not be varied to ensure overall efficiency is achieved.
The processing deposits and withdraws turned to be relatively low, in comparison with the other operations, which might be the possible reason for more customers totaling to about 100,000. This is unlike in the opening account section, which seemed to have relatively returns since it had few clients summing up to about 500.
Based on the above comments then, the Deerfield branch should focus more on attracting new customers to improve on the number of opened accounts aspects which should improve the operations. The value of the branch manager salary in the processing and deposit and withdraw section ought to be considered as it invariably differs from the others to ensure more motivation. Additionally, wages of the tellers in the opening account section turned to be too low in comparison with other unit teller manager wages probable reason why there are low opening account operations within the branch. The low teller salary issue should be resolved to ensure better motivation, an aspect that might keep the cost unit relatively low.
To sum up, based on the analyzed data of the Deerfield cost units that is; the wages of the tellers, assistance manager salary and the branch manager salary in the Deerfield should be within the acceptable levels in relations with other branches to ensure that effectiveness and efficiency of the units are optimized leading to higher achievement of the ADBI bank goals and strategic plans.
Conclusion
In conclusion, there is need to consider cost allotments in different units within an organization using a convenient method such as direct method, reciprocal or step down method based on the number of units that a firm produces in its production and service center units to ensure effective evaluation of each unit performance in relations with the desired goals and strategies of a firm.
References
James, B.S. (2002). Cost allocation- From simple to Sublime. Management Accounting Quarterly, 4(1), 1-10.
Yukcu, S, & Ozkaya, H. (2010). Comparison of the methods of allocation of service departments’ costs to operating departments: A Monte Carlo simulation. African Journal of Business management, 4(5), pp. 764-769.
Togo, D. (2014). Improve accounting for Cost Allocations from support to Revenue- generating with the reciprocal method. American Journal of Health Sciences, 5(1), pp. 1-4.