which of the following statement about step down method of cost allocation is most correct?
a. the step down method is less complex than the direct method
b. the step down method recognizes some of the intra-support department relationships
The correct answer and explanation is:
The correct answer is b. the step down method recognizes some of the intra-support department relationships.
Explanation:
The step down method of cost allocation is a system used to allocate costs from support departments to production departments. In this method, costs are allocated from one support department to both production departments and other support departments in a sequential manner. The key characteristic of the step-down method is that it recognizes some of the intra-support department relationships, but not all.
This method works by first allocating the costs of one support department to the production departments and to other support departments. The support departments are ranked in some order, typically based on the extent to which they provide services to other departments, including both production and other support departments. Once the costs of the first support department are allocated, the next support department’s costs are allocated, considering the previously allocated costs. However, one limitation of this method is that it does not fully recognize all intra-support department relationships. For instance, if a support department provides services to another support department, the step-down method may not fully account for that relationship in later steps of the allocation process.
In contrast, the direct method allocates costs only from support departments directly to production departments, without considering the support department relationships. This method is simpler because it ignores any interrelationships between support departments. The step-down method, however, offers a bit more accuracy in its allocation by partially considering these relationships, though still in a limited fashion.
The step-down method is more complex than the direct method but less complex than the reciprocal method, which fully accounts for all intra-support department relationships. Hence, option b is the most correct because it emphasizes that the step-down method recognizes some, but not all, of the relationships between support departments.