16.3.2: Step-Down Method

Step-Down Method

The step-down method—also called the sequential allocation method—allocates support-department costs to other support departments and operating departments in a sequential manner that partially recognizes the mutual services provided among support departments.

Exhibit 16-5 shows the step-down method. The Engineering and Production Control budgeted costs of $300,000 are allocated first—30% to the Materials Management Department, 50% to the Machining Department, and 20% to the Assembly Department (see Exhibit 16-3). Therefore, $90,000 is allocated to Materials Management (30% of $300,000), $150,000 to Machining (50% of $300,000), and $60,000 to Assembly (20% of $300,000). The Materials Management Department budgeted costs now total $354,000: budgeted costs of the Materials Management Department before any interdepartmental cost allocations, $264,000, plus $90,000 from the allocation of Engineering and Production Control Department costs to the Materials Management Department. The $354,000 is then only allocated to the two operating departments in the proportion of 800:2,800 materials-handling labor-hours in the Machining Department and the Assembly Department, respectively (see Exhibit 16-3). The Machining Department is allocated $$ text 78,667?? end text left parenthesis 800 divided by text 3,600 end text × straight $ text 354,000 end text right parenthesis$ is and the Assembly Department is allocated $$ 275,333 (2, 800 / 3,600 \times $ 354,000)$ .

Flow diagram shows the step-down method of allocating support-department costs at Robinson Company for 2020.

Details of the flowchart are as follows:

The diagram is divided into two parts, support departments and operating departments.
Support department contains engineering and production control of $300,000 and materials management, which receives $90,000 from engineering and production to the already existing $264,000 to become $354,000.
Operating department contains machining department, which receives $150,000 from engineering and production control and $78,667 from materials management.
Operating department also contains assembly department, which receives $60,000 from engineering and production control $275,333 from materials management.

Spreadsheet screenshot shows the various allocation costs for support departments and operating departments.

Details of the spreadsheet are as follows:

Support department

Engineering and Production Control
- Budgeted overhead costs before any interdepartment cost allocations: $300,000
- Allocation of engineering and production Control: (300,000) in parentheses
- Total budgeted overhead of operating departments: $0
Materials management
- Budgeted overhead costs before any interdepartment cost allocations: $264,000
- Allocation of engineering and production Control: 90,000
- Allocation of materials management: (354,000)
- Total budgeted overhead of operating departments: $0
Operating Department

Machining:
- Budgeted overhead costs before any interdepartment cost allocations: $329,000
- Allocation of engineering and production Control: 150,000
- Allocation of materials management: 78,667
- Total budgeted overhead of operating departments: $557,667
Assembly:
- Budgeted overhead costs before any interdepartment cost allocations: $227,000
- Allocation of engineering and production control: 60,000
- Allocation of materials management: 275,333
- Total budgeted overhead of operating departments: $562,333
Total budgeted overhead of operating departments: $1,120,000

Note 1: Base is $120,000 (sum of $36,000, 60,000, and 24,000), so $36,000 divided by $120,000 gives the fraction 3 by 10, $60,000 divided by $120,000 gives the fraction 5 by 10, and $24,000 divided by $120,000 gives the fraction 2 by 10.

Note 2: Base is $3,600 (sum of $800 and 2,800), so $800 divided by $3,600 gives the fraction 2 by 9 and $2,800 divided by $3,600 gives the fraction 7 by 9.

This method requires managers to rank (sequence) the support departments in the order that the step-down allocation is to proceed. In our example, the budgeted costs of the Engineering and Production Control Department were allocated first. Different sequences will result in different allocations of support-department costs to operating departments, for example, if the Materials Management Department costs had been allocated first and the Engineering and Production Control Department costs second. A popular step-down sequence begins with the support department that renders the highest percentage of its total services to other support departments, continues with the department that renders the next-highest percentage, and so on, ending with the support department that renders the lowest percentage.^* In our example, budgeted costs of the Engineering and Production Control Department were allocated first because it provides 30% of its services to the Materials Management Department, whereas the Materials Management Department provides only 10% of its services to the Engineering and Production Control Department (see Exhibit 16-3).

Under the step-down method, once a support department’s costs have been allocated to other departments, such as the costs of the Engineering and Production Control Department allocated to Materials Management, Machining, and Assembly Departments, no subsequent support-department costs are allocated back to it. The result is that the step-down method does not recognize the total services that support departments provide to each other. The reciprocal method fully recognizes all such services, as we will see next.