Reciprocal Services Calculator (Full Cost)

Reciprocal Services Calculator

Explanation of the Reciprocal Services Problem

The reciprocal services problem is related to the indirect cost allocation table. To understand the issue, we must first understand the purpose of this table. In fact, the objective of this table is to classify costs into three types:

• Procurement costs
• Production costs
• Distribution costs

Let's take the case of a company that has incurred indirect costs. Initially, the company's costs are distributed between auxiliary and main centers as follows:

The next step is to empty the auxiliary centers. That is to say, to distribute the amount of costs of the auxiliary centers among the main centers. Generally, we use keys such as percentages. There are 3 possible situations

Situation 1

The cost of auxiliary centers is distributed only among main centers

In this case, it's very simple; we simply calculate directly

Situation 2

Only one auxiliary center gives a percentage of its cost to the other auxiliary center.

In this case, we need to calculate the total cost of the administration center to be distributed: 3000 + 0.05*2000 = 3100

Situation 3

Both centers provide services to each other.

In this case, we must first calculate the amounts to be distributed by setting up a system of equations as follows:

M = 5850 + 0.25A

A = 7800 + 0.1E

Then, we solve the system. We find M = 7850 and A = 8585. These two amounts will be distributed and allow us to empty the auxiliary centers.