Sequential method definition
/What is the Sequential Method?
The sequential method is used to allocate the cost of service departments to other departments within an organization. Under this approach, the cost of each service department is allocated one department at a time. Thus, the cost of one service department is allocated out to all user departments, which may include other service departments. Once these costs have been allocated, the costs of the next service department are allocated. The first department cannot receive an allocation from any other departments - in essence, there is a one-way cost allocation.
Because this method involves a one-way cost allocation, it is not entirely theoretically correct. A more ideal solution would involve a two-way allocation. However, the sequential method is fairly easy to calculate, and so is commonly used.
How to Allocate Costs Using the Sequential Method
To allocate costs using the sequential method, follow these steps:
Rank service departments. Create a ranking of your service departments, where the one providing the most services to the other departments is ranked at the top, and the department providing the fewest services is at the bottom.
Allocate department costs. Starting with the top-ranked service department, allocate its costs to the departments that it services, based on a valid basis of allocation (such as hours worked or square footage cleaned).
Continue allocations. Work down through the stack of ranked service departments, allocating the costs of each service department to the departments they served.
Terms Similar to the Sequential Method
The sequential method is also called the step allocation method.
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Advantages of the Sequential Method
There are several advantages associated with using the sequential method, which are as follows:
More accurate than the direct method. Unlike the direct method, which ignores service-to-service department interactions, the sequential method partially accounts for interdepartmental support. This leads to a more accurate cost allocation, especially in businesses where service departments assist each other.
Systematic allocation. The step-by-step approach used in the sequential method ensures that costs are allocated in a structured manner, reducing errors.
Simpler than the reciprocal method. While the reciprocal method is the most accurate, it requires solving simultaneous equations, making it complex and time-consuming. The sequential method offers a balance between accuracy and simplicity, making it easier to implement in real-world accounting.
Improves cost control. By showing how costs flow through the organization, companies can identify high-cost service departments and implement cost-saving measures.
Widely accepted. Many companies and accounting systems recognize and use the sequential method due to its balance of accuracy and practicality. It is commonly used in manufacturing, healthcare, and service industries where multiple support departments exist.