Step-down, direct, and reciprocal methods, accuracy of allocation (Appendix 8A) Software Plus Corporation produces flight and driving simulations and games for personal computers. The president has a complaint about the accounting for support department costs. He points to the following table describing the use of various support departments in the company and says, "According to this table, every department receives services from all the support departments. But I understand that only some of the support departments are bearing costs from the other support departments. Why is that?"
Percent Use of Services
Support Department Cost Administration Maintenance Information Systems Games Manufacturing Simulation Manufacturing
What method has Software Plus Corporation been using to allocate support costs? Explain how you know.
Which method would ignore all interactions among support departments? Explain.
Which method would consider all interactions among support departments? Explain.
Allocate the support department costs to Games and Simulations using the step-down method. Explain how you decided which department's costs to allocate first.
Allocate the support department costs using the direct method.
Allocate the support department costs using the reciprocal method.
In your own words, explain how the step-down method improves upon the direct method.
In your own words, explain how the reciprocal method improves upon the step-down method.
Hi there! Please see my below response.
Software Plus Corporation is currently using the step-down method to allocate support costs. I know this because the president said "only some of the support departments are bearing costs from the other support departments." If the direct method was being used, then none of the support departments would receive costs from any other support department. If the reciprocal (simultaneous) method was used, then you would see some of the support costs being allocated among the support departments. The step-down method is a hybrid method of sorts where overhead costs are allocated, but such that once a department sends out its expenses to other overhead departments, it no longer receives expenses from other departments.
Although support departments obviously support each other as well, for the sake of simplicity and ease of use, the direct method ignores this. Using the direct method means that overhead costs are only allocated out to revenue producing (non-overhead) departments. One example of this might be costs from the housekeeping department. Chances are, housekeeping also cleans the administrative building, which is also an overhead department. However, the direct method would not account for this interaction. This is the simplest of the three methods.
The reciprocal method would consider all interactions amongst ...
This in-depth solution of 891 words and step-by-step calculations in an Excel file compares the direct, step-down, and reciprocal overhead allocation methods.