What is cost allocation method?

A cost allocation methodology identifies what services are being provided and what these services cost. It also establishes a basis for allocating these costs to business units or cost centers based on their appropriate share of such cost.

What is step down method?

Unlike direct method, the step method (also known as step down method) allocates the cost of a service department to other service departments as well as to operating departments. The cost allocation under step method is a sequential process.

What is step method in cost accounting?

Step Method of Cost Allocation:

Step method is the method of allocating service department’s costs to other service departments, as well as to operating departments, in a sequential manner. The sequence typically starts with the service department that provides the greatest amount of service to other departments.

How do you use the step method in accounting?

Quote from video: First then Human Resources then I T then accounting let's go ahead and pull down those direct costs 250,000 for counting fifty thousand for daycare. Two hundred thousand for IT.

What are the three methods of cost allocation?


There are three methods commonly used to allocate support costs: (1) the direct method; (2) the sequential (or step) method; and (3) the reciprocal method.

Why use the step down method?

Quote from video: Instead of the direct method where we just ignored any interplay between the support departments and just allocated everything to the operating divisions.

What are step costs examples?

Step costs are common – the cost of a new production facility, the cost of a new machine, supervision costs, marketing costs, etc., are all step costs.

Is step method more accurate than direct method?

The step-down method is more accurate than the direct method, but less accurate than the reciprocal method. The reciprocal method is more accurate than the other two methods because it fully recognizes self services and reciprocal services between service departments.

What is reciprocal method in cost accounting?

What is the Reciprocal Method? The reciprocal method uses simultaneous equations to allocate the costs incurred by service departments to other departments; allocations are also made between the service departments. This method results in an accurate distribution of costs.

What is the High Low method?

In cost accounting, the high-low method is a way of attempting to separate out fixed and variable costs given a limited amount of data. The high-low method involves taking the highest level of activity and the lowest level of activity and comparing the total costs at each level.

Which allocation method is best?

The best method for allocating overhead in construction is a way that’s fair. After all, the idea is to allocate (or, distribute) costs that each job shares responsibility for — meaning the job either caused or benefited from the cost. But, the costs should also be proportional to that responsibility.

What is two step allocation process?

A two-stage system first allocates costs to departments or activities and then allocates costs from the departments or activities to the products or services.

Why is the reciprocal method better?

The reciprocal method fully recognizes the other service departments by allowing reallocations back to each service department. As such, it’s more difficult to calculate but also more accurate than the other methods.

What is the sequential method?

The sequential method is used to allocate the cost of service departments to other departments within an organization. Under this approach, the cost of each service department is allocated one department at a time.

How do you solve the reciprocal method?

Quote from video: Right and then now there's 40,000 total hours that the admin staff provides. And mountaineering is 15,000 out of the 40. So we're going to go 15 divided by 40 times the 46,000.