Service department costs are allocated to producing departments

• to meet the objectives of full cost computation, managerial motivation, or managerial decision making.

• by using the direct, step, or algebraic method.

>- The direct method assigns service depart¬ ment costs only to revenue-producing de¬ partments but does not consider services that can be provided by one service department to another.

>- The step method uses a benefits-provided ranking that lists service departments from the one providing the most service to other departments to the one providing service pri¬ marily to the revenue-producing areas. Costs are assigned from each department in order of the ranking.

>- The algebraic method recognizes the inter¬ relationships among all departments through the use of simultaneous equations. This method provides the best allocation infor¬ mation and is readily adaptable to computer computations. LO.1