The direct an approach is considered the many simple an approach of allocating the price of business departments to operation departments. Under this method, the costs incurred by company departments space not allocated to each other; rather, lock are straight allocated to operating departments utilizing some appropriate allocation base. In other words, we can say that the direct an approach of departmental cost allocation ignores the service detailed by a service department come itself and to other organization departments.

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Suppose, for example, a agency has four departments – department A, department B, room C and also department D. The department A and also B are organization departments whereas department C and also D room operating departments. If the direct an approach of cost allocation is used, the cost incurred by room A and department B would be allocated to department C and also department D only. The expense of department A and department B would certainly not it is in allocated to every other even if the two departments administer a far-reaching amount of company to every other.

Example

The Murphy company has two service departments and also two operation departments as presented below:

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The two business departments provide service to every other as well as to operating departments. The department A’s price is allocated ~ above the communication of employee hours and also department B’s price is allocated ~ above the basis of square feet occupied.

Required: point out the price of service departments to operating departments using direct technique of expense allocation.

Solution

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*Department A’s price has to be allocated ~ above the communication of employee hours:

9,000 hours + 15,000 hrs = 24,000 hours.

Allocated to department X: $180,000 × (9/24) = $67,500Allocated to room Y:$180,000 × (15/24) = $112,500

**Department B’s price has been allocated on the communication of spaces occupied:

3,000 square feet + 22,000 square feet = 25,000 square feet.

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Allocated to room X: $45,000 × (3/25) = $5,400Allocated to room Y:$45,000 × (22/25) = $39,600

Important points to remember:

You have to note the following two essential points concerning the price allocation given in the over example:

The amount of allocation base that is attributable only to operating departments has actually been supplied under direct method of departmental price allocation. Any allocation base attributable to organization departments themselves has actually been ignored. Notice, that both department A and also department B (service departments) have recorded some employee hours yet nothing from room A’s cost has to be allocated to them. Similarly, both the departments accounting some room but it has been ignored while allocation the price of room B.After allocating the whole cost of business departments to operation departments, the final price of operation departments would be used to compute overhead rates for the purpose of costing products produced or services detailed by the operation departments.