Definition: For the reciprocal method of cost accounting , a complete reciprocated cost is the budgeted amount for a service department plus any allocations from other service departments. In other words, it considers the cost of service departments exchanging support between one another in addition to the cost of service to production departments.
What Does Complete Reciprocated Costs Mean?
Complete reciprocated costs are calculated in order to fully account for interdepartmental services that occur in a business. While service departments exist to ensure that revenue-producing departments run smoothly, they also need to provide support to other service departments. For simplicity purposes, businesses commonly use more traditional cost allocation methods that focus on allocating service department overhead to revenue-producing departments. By looking at complete reciprocated costs , businesses can get a more inclusive picture of total costs for service departments.
Let’s look at an example.
Scott owns a small manufacturing business in Columbus. His company consists of two service departments (human resources and information technology) and two revenue-producing departments (compressors and filters). The departmental costs for the service departments are as follows:
- Service Departments
- Human Resources (HR): $20,000
- Information Technology (IT): $30,000
Additionally, Scott has determined that 10% of the cost of the human resources department is attributed to information technology, while 15% of the cost of information technology is attributed to human resources.
Scott would like to calculate the complete reciprocated cost for the human resources department. In order to do this, equations for each department should be set up in such a way that they capture both the budgeted amount as well as the allocated amount from the other service department:
- HR= $20,000 + .15IT
- IT= $30,000 + .10HR
By plugging the value of IT into the first equation, complete reciprocated cost can be calculated for HR:
- HR= $20,000 + .15($30,000 + .10HR)
- HR= $24,500 /.9
- HR= $27,222