Sequential Method
The Sequential Method, often referred to in the context of cost accounting, is a technique used to allocate the costs of support departments to operating departments. This method is called “sequential” because support departments are allocated in a particular sequence, one after the other.
In situations where multiple support departments provide services to other support departments as well as operating departments, the cost allocation can become complex. The Sequential Method tries to address this by allocating the costs of the most service-intensive support department first, followed by the next, and so on, until all support department costs have been allocated.
Here’s a step-by-step overview of the process:
- Rank the Support Departments : Start by ranking the support departments based on the extent of services they provide to other support departments. The one providing the most services is usually allocated first.
- Allocate Costs: Beginning with the first support department in the sequence, allocate its costs to other support departments and to the operating departments based on specified allocation bases (e.g., square footage, number of employees, machine hours).
- Continue the Sequence: Once the costs of the first support department have been fully allocated, move to the next support department in the sequence. When allocating costs for this department, consider only the costs originally belonging to it and ignore the costs that have been allocated to it from the previous support department(s).
- Complete the Allocation : Continue the process until all support department costs have been allocated to the operating departments.
- Compute Total Costs: For each operating department, sum the directly traced costs and the allocated support department costs to compute the total costs.
Example:
Suppose a manufacturing company has two support departments: Maintenance (M) and Human Resources (HR), and two operating departments: Assembly (A) and Finishing (F). The company determined that Maintenance provides more services to other departments than HR does.
- Allocate Maintenance’s costs first to HR, A, and F based on some criteria (e.g., machine hours).
- Next, allocate Human Resources’ costs to A and F. Note that at this point, HR will have its original costs plus some costs allocated from Maintenance. However, only HR’s original costs will be allocated to A and F.
- Finally, sum up the allocated costs and direct costs for Assembly and Finishing to determine their total costs.
The Sequential Method offers a more refined approach than the Direct Method (which ignores services provided among support departments) but is simpler and less accurate than the Reciprocal Method (which fully considers mutual services among support departments).
Example of the Sequential Method
Let’s delve into a more detailed example using the Sequential Method for cost allocation.
Scenario:
Imagine a factory with two support departments: Maintenance (M) and Human Resources (HR). There are also two operating departments: Assembly (A) and Finishing (F). Maintenance is ranked first because it provides more services to other departments compared to HR.
Given:
- Direct Costs:
- Maintenance (M): $100,000
- Human Resources (HR): $80,000
- Assembly (A): $200,000
- Finishing (F): $250,000
- Maintenance costs are allocated based on machine hours.
- HR uses 100 machine hours.
- Assembly uses 600 machine hours.
- Finishing uses 300 machine hours.
- HR costs are allocated based on the number of employees.
- Assembly has 20 employees.
- Finishing has 30 employees.
Step 1: Allocate Maintenance Costs:
Total machine hours = 100 (HR) + 600 (A) + 300 (F) = 1000 machine hours
Cost per machine hour = $100,000 ÷ 1000 = $100/hour
Allocations:
- HR: $100 x 100 hours = $10,000
- Assembly: $100 x 600 hours = $60,000
- Finishing: $100 x 300 hours = $30,000
Step 2: Allocate Human Resources Costs:
After receiving costs from Maintenance, HR now has a total of $80,000 (original) + $10,000 (from M) = $90,000.
Total employees = 20 (A) + 30 (F) = 50
Cost per employee = $90,000 ÷ 50 = $1,800/employee
Allocations:
- Assembly: $1,800 x 20 = $36,000
- Finishing: $1,800 x 30 = $54,000
Step 3: Compute Total Costs:
- Assembly: $200,000 (direct costs) + $60,000 (from M) + $36,000 (from HR) = $296,000
- Finishing: $250,000 (direct costs) + $30,000 (from M) + $54,000 (from HR) = $334,000
Results:
After applying the Sequential Method:
- Assembly Department’s total costs: $296,000
- Finishing Department’s total costs: $334,000
This example illustrates how the Sequential Method distributes the support department costs first from Maintenance (because it serves more departments) and then from HR to the operating departments.
