Using the following example, allocate service center costs to each of the three revenue centers using the step-down method:
Costs Square Feet Meals Employees
Maintenance $ 150,000 ---- 2,500 10
Dietary 400,000 10,000 ---- 15
Administrative 600,000 20,000 2,500 10
Laboratory 600,000 30,000 2,500 20
Radiology 800,000 40,000 2,500 30
Nursing 2,000,000 100,000 30,000 50
$ 4,550,000 200,000 40,000 135
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See Excel and Word attachments.
The step-down method involves allocating the costs of each service center to the remaining centers (service/revenue) through an allocation method. Once a service center has its costs allocated to the remaining centers it is removed from consideration of future cost allocations.
In this particular problem the step-down method will proceed as follows:
1. Allocate Maintenance costs based on Square Feet
2. Allocate Dietary costs based on Meals
3. Allocate Administrative costs based on Full-Time Employees
The details of the allocation are in the attached Excel file.
1. The Maintenance costs ($150,000) are allocated to the remaining five departments (two service departments and three revenue departments) based on Square Feet (200,000). For example the Dietary departments is allocated (10,000/200,000) * $150,000 = $7,500.
2. Once the Maintenance costs are allocated the remaining departments have revised costs. For example the Dietary department has revised costs of $400,000 + $7,500 = $407,500.
3. The Dietary department costs $(407,500) are allocated to the remaining four departments (one service and three revenue) based on Meals (37,500 Meals since the Meals from the Maintenance department are excluded). For example the Administrative department is allocated (2,500/37,500) * $407,500 = $27,167.
4. Once all service departments have allocated their costs the allocation is complete.
5. As a check: the fully allocated costs are equal to the initials costs of $4,550,000.