Scribd
Upload
427 views

Reciprocal Method Help For Excel

The reciprocal method of cost allocation is the most accurate method because it mathematically recognizes all services provided between departments. It sets up equations for each department's total costs based on direct costs and costs allocated from other departments. These equations can be solved using matrix algebra, which electronic spreadsheets like Excel can perform quickly through functions like MINVERSE. The document then demonstrates setting up the raw cost and usage data, creating the coefficient matrix, inverting it with MINVERSE to find the allocation proportions, and multiplying the inverse matrix by department costs to calculate the final cost allocations between departments.

Uploaded by

Nafis Hasan
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
427 views

Reciprocal Method Help For Excel

The reciprocal method of cost allocation is the most accurate method because it mathematically recognizes all services provided between departments. It sets up equations for each department's total costs based on direct costs and costs allocated from other departments. These equations can be solved using matrix algebra, which electronic spreadsheets like Excel can perform quickly through functions like MINVERSE. The document then demonstrates setting up the raw cost and usage data, creating the coefficient matrix, inverting it with MINVERSE to find the allocation proportions, and multiplying the inverse matrix by department costs to calculate the final cost allocations between departments.

Uploaded by

Nafis Hasan
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 3

Reciprocal Method Help for Exceli

The reciprocal method of cost allocation is the most accurate method because it mathematically recognizes all services provided by each support departments, including those provided to other support departments. The reciprocal method expresses the total service costs of each service and production department in equation form: total department costs = direct costs of the department + costs allocated to the department This creates one equation for each department where the unknown element is the total departmental service cost. This set of equations is then solved using matrix algebra. Nowadays, no one needs to invert and multiply matrices by hand. Electronic spreadsheet programs such as Lotus 1-2-3 and Excel can invert the coefficient matrix quickly and easily. This procedure is demonstrated below with both instructions and an example, below. Before attempting to do the assigned homework, it is suggested that you attempt to do this example first, re-creating it in Excel step-by-step, as follows: Step 1: set up the raw information: Used BY>>>> S1 S2 S1 . 10% S2 20% . P1 50% 70% P2 30% 20% Total 100% 100%

Department Costs $80,000 $130,000 $250,000 $300,000 $760,000 Step 2: set up the usage coefficient matrix: NOTE: You want all costs of the Service Departments to go OUT; that's why they are -100% for themselves. You want all costs of the Production Departments to stay in those departments; that's why they are positive 100% for themselves. The other percentages on the top two rows are either copied from the above table (if that table has percentages) or are computed from the above table (if the raw information is in hours or other units). The other percentages on the bottom two rows are zero because you don't want those costs to go anywhere else. Relative-use Coefficients TO: S1 S2 S1 S2 P1 P2 -100% 20% 10% 0% 0% 0% 0% P1 P2

50% 30% 100% 0% 0% 100%

-100% 70% 20%

Step 3: invert the usage coefficient matrix: Procedure for Lotus 1-2-3:

1. Select /DATA MATRIX INVERT 2. Specify the matrix you want to invert by highlighting it (in the example above, this would be cells B2 to E5 in the above table) 3. Specify where you want the inverse matrix to be located by highlighting it (you may specify either the entire range or only the first [top left] cell in the range. Be careful because Lotus will overwrite the contents of any cells that are not blank. Procedure for Excel: 1. Highlight the area where you want the inverse matrix to be located. Be sure to make the output area the same size as the coefficient matrix because Excel will use only the area you specify; so if it is too small, not all of the inverse matrix will be displayed. 2. Type the following EXACTLY (don't forget the equal sign at the beginning and the open parenthesis at the end!!!): =MINVERSE( NOTE: Do not click on the "equal sign" icon then type MINVERSE( -- you must type the entire thing as explained above!!! As usual, Excel makes no sense. Again, be sure to thank Bill Gates for this!) Then highlight the coefficient matrix to be inverted (in the example above, this would be cells B2 to E5) NOTE: Do not include the title rows/columns nor the total rows/columns. Only include the percentages (coefficients). You must copy the titles down to the inverse matrix manually. Then press CTRL-SHIFT-ENTER simultaneously. The inverse matrix will look something like this: Inverse Coefficients TO: S1 S2 FROM: S1 S2 P1 P2 P1 P2

-1.020 -0.204 0.653 0.347 -0.102 -1.020 0.765 0.235 0 0 0 0 1 0 0 1

The inverse matrix contains the proportional allocations of each department's costs to each other department. The negative proportions represent a service department's costs allocated to other service departments. NOTE: For service departments, the total of the negative percentages is more than 100% because costs are allocated from them to each other and back again, bringing service departments' total costs USED up to an amount higher than their own costs. Therefore, there may be allocations out of each service department in excess of 100% of its own spending.

However, the total amount of dollars allocated to production departments will not exceed total service spending, as you will see when you do step 4. Step 4: Set up the cost allocation table Multiply the inverse matrix by each department's spending (i.e., the amount in the bottom row of the first raw information table, Department Costs. The result will give you the total to be allocated to each production department, looking something like this: Support Cost Allocations TO: S1 FROM: S1 S2 P1 P2 TOTAL S2 P1 99,490 250,000 P2 TOTAL

$(81,633) ($16,327) $52,245 $27,755 . $(13,265) $(132,653) . . . . . . 30,510 . 0.

0 300,000 . $401,735 $358,265 $760,000

Please note that the total of rows B2 and C2 in the table above (i.e., From S1 and From S2) will not equal zero. Also, B2 plus B3 won't equal the total of S1 departmental costs. That's OK. Don't worry about the top two rows or the first two columns. Just add up the production department columns. They should total up to the amount of cost that was originally in all four departments.

http://www.usu.edu/account/faculty/nelson/3310reciprocal.htm

You might also like