Secondary Distribution: Reapportionment of Service Department Costs

After the primary distribution, the service departments (stores, maintenance, power house, canteen) each carry a total of overhead. But service departments do not make the product — they exist only to serve the production departments (and sometimes one another). Their costs must therefore be passed on, or reapportioned, to the production departments that use their services. This second step is the secondary distribution summary, and its purpose is to leave the entire factory overhead sitting in the production departments only, ready to be absorbed into products.

The basis for reapportioning a service department's cost is the extent to which each production department uses that service:

Methods of secondary distribution. The complication is that service departments sometimes serve each other as well as the production departments. Three methods deal with this:

• Direct redistribution method — the simplest: each service department's cost is reapportioned only to the production departments, ignoring any service given to other service departments. Used when inter-service work is small.
• Step-ladder (step) method — service departments are ranked, and the one serving the most other departments is closed first, its cost being spread over all the remaining departments (production and the other service departments); then the next, and so on, in one downward sequence.
• Reciprocal service method — recognises that service departments serve each other mutually and settles the two-way charges fully (by the repeated-distribution or the simultaneous-equation technique). It is the most accurate but the most laborious.

A simple direct reapportionment (illustrative): suppose after primary distribution production departments A and B carry ₹3,100 and ₹2,200, and the service department S carries ₹900, with S serving A and B in the ratio 2 : 1.

| Particulars | Dept A (₹) | Dept B (₹) | Dept S (₹) | …