Cafeteria is a servicing department and other departments like Accounts, Quality, Production,

Engineering, Maintenance, etc are the receiving departments who get cost allocated based on the
service usage. The cost allocation is part of product costing where by ultimately all service department
costs should get allocated to production department based on appropriate cost drivers.

b. It seems the management is using the direct method of allocating overheads to production
department. The management should use step method or reciprocal method of cost allocation to
department rather than using direct method of cost allocation. Reciprocal method considers the mutual
service rendered by one service department to one another. The cost driver of number of employees
using the cafeteria service is appropriate for allocation of Cafeteria Department costs.