Step Down Method for Allocating Support Costs

This video shows how to use the Step-down Method (aka Sequential Allocation Method) to allocate the costs of multiple support departments when those support departments provide services to each other. With the Step-down Method, you first sequentially rank the support departments. Then you allocate the costs of the first support department to the operating divisions and other support department(s). After allocating all of the first support department's costs, you proceed to the second support department and begin its costs (which include any costs that were allocated to the second department by the first department). When allocating the costs of the second support department, however, you do not allocate any costs to the first support department. Thus, while the Step-down Method is an improvement upon the Direct Method in that it allocates some support department costs, it still does not fully allocate the costs attributable to inter-department services between the support departments. To fully capture this interaction, one must use the Reciprocal Method.

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