The sequential method, also known as the step-down method or the sequential allocation method, is an approach used to allocate support department costs to other departments in an organization. It takes into account the interdependencies and mutual services between support departments by allocating their costs in a sequential order.
Here are some key points about the sequential method for applying support department costs:
- Allocation Process: The sequential method involves allocating support department costs in a step-by-step or sequential manner. It considers the order in which support department costs are allocated based on the degree of mutual services or interactions between the support departments.
- Primary and Secondary Support Departments: In the sequential method, support departments are classified as either primary or secondary support departments. Primary support departments are those that do not receive any services from other support departments, while secondary support departments receive services from other support departments.
- Step 1: Allocation to Operating Departments: In the first step of the sequential method, the costs of primary support departments are allocated directly to operating departments based on a predetermined allocation basis. This step assumes that primary support departments provide services solely to the operating departments and not to other support departments.
- Step 2: Allocation between Support Departments: In the second step, the costs of secondary support departments are allocated. The allocation starts with the primary support departments that have already allocated their costs to the operating departments. The costs of the secondary support departments are allocated to other support departments and operating departments based on the proportion of services received.
- Step 3: Reciprocal Services: If there are any reciprocal services between support departments, the sequential method takes them into account. It considers the mutual services provided by support departments to each other and adjusts the cost allocation accordingly. This step ensures a more accurate allocation of costs based on the actual usage of support services.
- Accuracy and Complexity: The sequential method provides a more accurate allocation of support department costs by considering interdependencies and mutual services. However, it can be more complex and time-consuming to implement compared to simpler methods such as the direct method. It requires careful analysis of the relationships between support departments and thorough documentation of services provided.
The sequential method for applying support department costs recognizes the interactions and mutual services between support departments, resulting in a more accurate allocation of costs. It provides a more comprehensive view of cost sharing and can enhance cost management and decision-making within the organization. However, it requires careful consideration of the relationships between support departments and can be more challenging to implement than simpler allocation methods.
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