Cost Allocation: Step Method

Описание: In this video, we explain Cost Allocation: Step Method
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Introduction 0:00
Introduction to the Step Method (0:27): The step method accounts for services exchanged between service departments, unlike the direct method.
How the Step Method Works (1:01): One service department (S1) allocates overhead to another (S2), which then allocates its overhead to production departments. This method acknowledges interrelationships but in a one-way direction.
Step Method Example (4:17): The video uses an example with two service departments (maintenance and IT) and two production departments (assembly and packaging) to demonstrate how to allocate costs using the step method.
Applying the Step Method (5:36): The service department with the largest overhead (maintenance) allocates its costs first, followed by the next service department (IT), without any backward allocation.
Full Picture and Calculation (8:34): Computation of the assembly gets 18 + 51 equal 5:57 to 69,000 allocated from the maintenance and the it support the packaging is 30 + 9:02 51 equal to 81,000 now we include the total production cost assembly 70,000 69 9:09 + 70 = 139 81 + 50 = to 9:14 131 in total total production Department cost allocated is 9:20 270 150 was service and 120 is production




Step Method of Cost Allocation
The step method of cost allocation (also called the step-down method) is a widely used approach for distributing indirect costs from service departments to production departments. Unlike the direct method, it partially accounts for inter-service department interactions by allocating costs sequentially, starting with the service department that provides the most support to others.

What is the Step Method?

Definition: The step method allocates costs of service departments to other service departments and production departments in a sequential manner. Once a service department’s costs are allocated, it is closed out and no longer receives allocations from other departments.

Purpose: Balances simplicity and accuracy by partially accounting for interdepartmental services while avoiding the complexity of the reciprocal method.

When to Use the Step Method

Moderate Interdependence: Suitable for organizations where service departments provide
some support to each other but not extensively.

Efficient Allocation: Useful when precise calculations of mutual service exchanges are not critical but more accuracy than the direct method is desired.

Simplified Complexity: Offers a middle ground between the simplicity of the direct method and the precision of the reciprocal method.

How the Step Method Works
Identify Service and Production Departments
Service departments: Provide support services (e.g., IT, HR, maintenance).
Production departments: Perform core functions, such as manufacturing or sales.

Determine the Allocation Sequence
Rank service departments based on the amount of support they provide to other service departments (e.g., total cost, volume of services rendered).
The department providing the most support is allocated first.

Allocate Costs Sequentially
Begin with the service department ranked first. Allocate its costs to other service and production departments based on an appropriate cost driver.
Once allocated, the department is closed out and cannot receive costs from others.
Continue allocating costs from the remaining service departments in the predetermined order.

Example of the Step Method
Scenario:
A company has two service departments (HR and IT) and two production departments (Assembly and Packaging). The costs for each department are as follows:

HR: $50,000
IT: $30,000
Service department relationships:
HR provides 40% of its services to IT, 30% to Assembly, and 30% to Packaging.
IT provides 50% of its services to Assembly and 50% to Packaging.

Step 1: Determine Allocation Sequence
HR is allocated first because it provides support to IT and other departments.
IT is allocated second.

Step 2: Allocate HR Costs
HR provides 40% of its services to IT, so:
40%×50,000=20,000 to IT.
HR provides 30% each to Assembly and Packaging:
30%×50,000=15,000 to each.
After this step, HR is closed out.

Step 3: Allocate IT Costs (Adjusted for HR Allocation)
IT’s adjusted cost after receiving HR's allocation:
30,000+20,000=50,000.
IT allocates 50% of its costs to Assembly:
50%×50,000=25,000.
IT allocates 50% to Packaging:
50%×50,000=25,000.
Final Allocations:

Assembly:
15,000(HR)+25,000(IT)=40,000
Packaging:
15,000(HR)+25,000(IT)=40,000

Advantages of the Step Method
Accounts for Some Interdependence: Considers services exchanged between departments, improving accuracy over the direct method.

Simpler than the Reciprocal Method: Requires fewer calculations and is easier to implement.

Flexible: Suitable for organizations with moderate complexity in service department interactions.





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