What is the Reciprocal Method?

The reciprocal method uses simultaneous equations to allocate the costs incurred by service departments to other departments; allocations are also made between the service departments. This method results in an accurate distribution of costs. The method is rarely used, since there are somewhat less accurate methods available that require fewer calculations.

How the Reciprocal Method Works

There are three steps involved in the calculation of the reciprocal method, which are as follows:

Set up a formula for each service department that describes its own direct costs, plus a fraction of the costs incurred by other service departments on its behalf.
Simultaneously solve the equations for the set of service departments. This results in a cost total for each of the service departments.
Allocate the reconfigured service department costs to the various production departments, using whichever allocation method appears to make the most sense. For example, costs may be allocated based on square footage used, machine hours used, or the number of production line hours used.