Total Cost of Support Departments
To determine the total cost of a support department so that this total cost reflects interactions with other support departments, a system of simultaneous linear equations must be solved. Each equation, which is a cost equation for a support department, is the sum of the department’s direct costs plus the proportion of service received from other support departments.
Total cost = Direct costs + Allocated costs
The same data set contained in Exhibit 7.6 used to illustrate the direct and sequential methods will be used to illustrate the reciprocal method. Cornerstone 7.5 shows how and why the reciprocal method is used to allocate support department costs.