Comparison of methods for allocation of service departments' costs to operating departments: A Monte Carlo simulation

Abstract

In this paper, the performance of widely used methods for allocation of multiple service departments costs to operating departments namely direct method and two different applications of step-down method were compared by using the criteria of deviation of their results from those of reciprocal method which is posited as the most accurate method for allocation. Moreover the conditions under which each method yielded the best results were presented. Our dataset included randomly obtained 10000 observations with different percentages of service provided by service departments and different cost figures. Results indicated that the application of step-down method which considered percentage of service provided as the base for ranking service departments yielded least deviation from results of reciprocal method on average and yielded the best results with highest probability and the worst results with the least probability thus provided more accurate results than competing methods.