How can you allocate expenses for a service line?

1 Direct and indirect expenses

The first step for expense allocation and apportionment is to identify and classify the expenses related to a service line as direct or indirect. Direct expenses are those that can be easily traced and assigned to a specific service line, such as salaries, supplies, and equipment. Indirect expenses are those that cannot be directly attributed to a single service line, but benefit multiple service lines or the entire organization, such as rent, utilities, and administration. Indirect expenses need to be allocated or apportioned among the service lines based on some reasonable and consistent basis.

2 Allocation and apportionment bases

The second step for expense allocation and apportionment is to choose an appropriate allocation or apportionment base for each indirect expense category. An allocation or apportionment base is a factor or measure that reflects the relative use or consumption of an indirect expense by the service lines. For example, rent can be allocated based on the floor space occupied by each service line, utilities can be apportioned based on the number of employees in each service line, and administration can be apportioned based on the revenue generated by each service line. The choice of the allocation or apportionment base should be logical, fair, and consistent with the nature and purpose of the indirect expense.

3 Allocation and apportionment rates

The third step for expense allocation and apportionment is to calculate the allocation or apportionment rate for each indirect expense category. The allocation or apportionment rate is the ratio of the total indirect expense amount to the total allocation or apportionment base. For example, if the total rent expense is $100,000 and the total floor space is 10,000 square feet, the allocation rate for rent is $10 per square foot. If the total utility expense is $50,000 and the total number of employees is 500, the apportionment rate for utilities is $100 per employee. The allocation or apportionment rate is then applied to the allocation or apportionment base of each service line to determine the amount of indirect expense allocated or apportioned to each service line.

4 Allocation and apportionment methods

The fourth step for expense allocation and apportionment is to apply the allocation or apportionment methods to the indirect expense categories. There are different methods for allocating or apportioning indirect expenses, depending on the complexity and interdependence of the service lines. The simplest method is the direct method, which allocates or apportions each indirect expense category directly to the service lines, without considering any interactions or feedbacks among the service lines. The direct method is easy to implement and understand, but it may not reflect the true cost structure and behavior of the service lines. The more complex methods are the step-down method and the reciprocal method, which take into account the interrelationships and mutual services among the service lines. The step-down method allocates or apportions each indirect expense category in a sequential order, based on a predetermined hierarchy or ranking of the service lines. The reciprocal method allocates or apportions each indirect expense category simultaneously, using a system of equations or matrix algebra. The step-down method and the reciprocal method are more accurate and realistic, but they are also more difficult and time-consuming to apply.

5 Expense allocation and apportionment reports

The final step for expense allocation and apportionment is to prepare and analyze the expense allocation and apportionment reports for the service lines. The expense allocation and apportionment reports show the breakdown of the direct and indirect expenses for each service line, as well as the total expenses and the net income or loss for each service line. The expense allocation and apportionment reports can help managers and stakeholders evaluate the profitability, performance, and contribution of each service line, as well as identify the areas of improvement, efficiency, and optimization. The expense allocation and apportionment reports can also support decision-making, budgeting, and pricing for the service lines.