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.