Activity Based Costing With Reciprocal Dollar Value Allocation

Abstract

The general model of Activity Based Costing (ABC) allocates indirect costs to products using a two-state procedure which first assigns overhead costs to homogeneous cost pools and then assigns those costs directly to products based on the products use of activities. This procedure does not consider cross-servicing between service departments or activity centers, but rather uses the direct method of cost allocation. This paper presents Activity Based Costing with Reciprocal Dollar Value Allocation (ABC-RDVA) as one approach to using ABC in an environment where production service departments experience ea substantial level of cross-servicing, and use of the direct method would distort product costs.