This article looks at the various methods of re-apportioning service cost centre costs
When calculating unit costs under absorption costing principles each cost unit is charged with its direct costs and an appropriate share of the organisation’s total overheads (indirect costs). An appropriate share means an amount that reflects the time and effort that has gone into producing the cost unit.
Service cost centres are those that exist to provide services to other cost centres in the organisation. They do not work directly on producing the final product. Consequently, their costs must be re-apportioned to production cost centres so that their overheads can be absorbed into the final product. This article looks at the various methods of re-apportioning service cost centre costs.
The direct method
This is the simplest method and is ideal to use when service cost centres provide services to production cost centres, but not to each other. Example 1 considers such a situation.
A company’s overheads have been allocated and apportioned to its four cost centres as shown below.