Step Method of Cost Allocation:
Definition:
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.
Explanation:
Unlike the direct method, the step method
provides for allocation of a service department's costs to other service
departments, as well as to operating departments. The step method is
sequential. The sequence typically begins with to department that provides
the greatest amount of service to other service departments. After its costs
have been allocated, the process continues, step by step, ending with the
department that provides the least amount of services to other service
departments. Example:
To provide an
example of the step method, consider Mountain View Hospital, which has two
service departments and two operating departments as shown below:
|
Description |
Service Department |
Operating Department |
Total |
|
Hospital Administration |
Custodial Services |
Laboratory |
Daily Patient Care |
Departmental costs before
allocation
Employee hours
Space occupied square feet |
$360,000
12,000
10,000 |
$90,000
6,000
200 |
$261,000
18,000
5000 |
$689,000
30,000
45,000 |
$1,400,000
66,000
60,200 |
Hospital
administration costs will be allocated on the basis of employee-hours and
Custodial Services costs will be allocated on the basis of square feet
occupied.
The step method of allocating the
hospital's service department costs to the operating departments is shown
below:
|
Description |
Service Department |
Operating Department |
Total |
|
Hospital Administration |
Custodial Services |
Laboratory |
Daily Patient Care |
| Departmental
costs before allocation Allocation:
Hospital administration costs
(6/54, 18/54, 30/54)*
Custodial service department
costs (5/50, 45/50)**
Total costs allocation |
$360,000
(360,000)
-----------
$0
======
|
$90,000
40,000
(130,000)
----------
$0
=====
|
$261,000
120,000
13,000
-----------
$394,000
======
|
$689,000
200,000
117,000
----------
$1,006,000
=======
|
$1,400,000
1,400,000
=======
|
*Based on the
employee-hours in custodial services the two operating departments, which are
6,000 hours +
18,000 hours + 30,00 hours = 54,000 hours
**Based on the space occupied by the two
operating departments, which is 5,000 square feet + 45,000 square feet =
50,000 square feet Example shows
the treatment of step method of cost allocation. Note the following three
key points about these allocations.
- First, under the allocation heading in the
solution you see two allocations, or steps. In the first step, the costs
of hospital administration are allocated to another service department
(Custodial Services) as well as to the operating departments. In contrast
to the direct method, the allocation base for Hospital Administration
costs now includes the employee hours for custodial services as well as
for the operating departments. However, the allocation base still excludes
the employee-hours for Hospital Administration itself. In both the direct
and step methods, any amount of the allocation base attributable to the
service department whose cost is being allocated is always ignored.
- Second, looking again on the example, note
that in the second step under the allocation heading, the cost of
custodial services is allocated to the two operating departments, and non
of the cost is allocated to Hospital Administration even though Hospital
Administration occupies space in the building. In the step method, any
amount of the allocation base that is attributable to a service department
whose cost has already been allocated is ignored. After a service
department's cost have been allocated, costs of other service departments
are not reallocated back to it.
- Third, not that the cost of Custodial
Services allocated to other departments in the second step ($130,000) in
example, includes the costs of Hospital Administration that were allocated
to Custodial Services in the first step.
|
