Improve Accounting For Cost Allocations From Support To Revenue-Generating Departments With The Reciprocal Method

Abstract

The best accounting method for allocating the cost of support departments to revenue-generating departments is the reciprocal method because it recognizes all services provided to other departments. Hence, the reciprocal method better captures the full cost of services consumed by revenue-generating departments. Yet, many healthcare organizations continue to use the direct or step-down methods because the reciprocal method requires solving algebraic simultaneous equations in the allocation of many support departments. This educational resource removes the difficulty associated with the reciprocal method with a matrix approach that is demonstrated with an example. From information provided for any cost allocation method, three spreadsheet matrix commands formulate the set of linear equations for reciprocated costs of support departments, solve for the reciprocated costs, and then allocate the reciprocated costs to both support departments and revenue-generating departments.