Ask the Accounting Community

Widely understand is sometimes the same thing as widely misunderstood ... The word accuracy is bandied about in textbooks and certification materials these days, but  there is no such thing as true accuracy for jointly shared fixed resources.  For a single period you might well get virtually the same total costs with direct, step, or reciprocal.  The reciprocal method in theory should better trap interdepartmental resource use and might give better signals  on controlling future use, but under only under two important conditions: 1) the majority of the costs go up and down because of use (vs just a mostly fixed joint cost) and 2) the system goes to the trouble to tell users what the cost per unit was ... not just the total cost allocated to their dept-- so that users can look at the cost per unit  as price incentive to hold down future resource use  – use more/get charged this much more, so be as efficient as possible to make your dept look better.   Even if you get the same total cost from direct/step/reciprocal these per unit signals will be skewed under direct and step because some parties do not get charged for use at all.  The issue is does it matter – are the managers of  other indirect costs pool areas able to control use of the other areas' services in a way that would cause overall system costs to go down in the long run?  For example, when user departments purchase office or manufacturing materials in fewer lots, will that eventually cause cost layoffs in the purchasing department because fewer people are needed?

Reciprocal is doable these days if you go to trouble to make yourself a reusable template ... the problem is if the results are not expressed to users as a  per/unit cost of resources, then users may not get the signal to use less resources over time. If the current cost allocations  do not cause incentives for lower future costs in the other area, it is a useless black box where the 'widely understood' greater 'accuracy' is (in my opinion)  likely to accomplish nothing in the long run. Shouldn't cost accounting  be more about incentivizing future cost control rather than just thinking one is getting 'accurate' allocations? The whole point of an allocation is a reasonable scheme of sharing costs that by their very nature cannot be directly traced. Directly traceable costs can be said to be accurate vs inaccurate ...  for others, the bigger issue is whether allocation scheme  causes functional vs. dysfunctional future behaviors in the organization.      

Thank you for asking the question. Sorry to run long.  It is an issue I would like to see practitioners weigh in on more, even if they totally disagree with my take on the subject.  

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