Cost Allocation Methods
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Written by admin on September 17, 2008 – 11:42 pm
Mechanically, cost allocation can be accomplished in a variety of ways, and the method used is somewhat discretionary. No matter what method is chosen, all support department costs eventually must be allocated to the departments (primarily, patient services departments) that create the need for the overhead costs.
The key differences among the methods are how support services provided by one department are allocated to other support departments.
The direct method totally ignores services provided by one support department to another; the reciprocal method recognizes all of the intrasupport department services; and the step-down method represents a compromise that recognizes some, but not all, of the intrasupport department services.
Regardless of the method, all of the support costs within an organization ultimately are allocated from support departments to the departments that generate revenues for the organization and hence create the need for the support services.
