Step Down Method for Allocating Support Costs

This video shows how to use the Step-down Method (aka Sequential Allocation Method) to allocate the costs of multiple support departments when those support departments provide services to each other. With the Step-down Method, you first sequentially rank the support departments. Then you allocate the costs of the first support department to the operating divisions and other support department(s). After allocating all of the first support department's costs, you proceed to the second support department and begin its costs (which include any costs that were allocated to the second department by the first department). When allocating the costs of the second support department, however, you do not allocate any costs to the first support department. Thus, while the Step-down Method is an improvement upon the Direct Method in that it allocates some support department costs, it still does not fully allocate the costs attributable to inter-department services between the support departments. To fully capture this interaction, one must use the Reciprocal Method.
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[@kyl33333]

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My pleasure! I'm glad you're mastering the concepts. Reading accounting textbooks is about as fun as staring at the wall :)

[@nataliavoronova158]

Great video. Thanks. Although it would be better if you explained the logic behind the ranking. If the highest rank goes to the department with highest costs incurred then wouldn't it be admin in this case?

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[@g16565]

You have not explained on what basis the ranking is being done.. That would have made this even more clearer even though the explanation is indeed very good.

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[@Edspira]

Welcome to the party!

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[@Edspira]

Thank you for the kind words and the encouragement!

[@MyFinancialFocus]

Awesome explanation!

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[@DiaXisHD]

So how did you rank them?

[@prettyyella32]

Thank you 🙏 I understand....

[@ibrahimzakria5178]

Great Explanation. thanks guys

[@jeremylaster3280]

Can you make a video on Spoilage costing -process costing and how to account for it. Your videos are a great help.

[@Edspira]

I currently have 8 videos on process costing (edspira.com/lessons/process-costing), but spoilage costing is not one of them. I will add this to my list of requested videos. Thanks!

[@tarawnie]

You missed one critical part, how did you rank them?

[@lenku-vinceoosthuizen964]

STILL DONT KNOW LOL

[@prettyyella32]

HR was the first in sequence. He said that.......

[@DAfycariad]

You rank in accordance to functional importance. Meaning that a company that ranks HR cost allocation extremely important for company wide functions (staying in business due to high costs %) will rank HR #1 and every other acct after that is ranked in lower importance (if that makes sense). Also, he did answer the question: "The ranking does matter, and this is usually based on the percentage of costs that a support department incurs to support other support departments. The support department with the highest percentage would be allocated first. Good question!"

[@baynemarrowe2003]

Sometimes, it will be stated in the problem which service department to start but typically you start with the dept that renders service to the greatest number of other service depts and ends with the least number of other depts.

[@axel7918]

thank you

[@johnnyneves19]

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[@Edspira]

Thank you - best wishes to you as well!

[@suziehaberman9802]

How do you know which support department to rank first?

[@jimelewa7861]

Following

[@Mustafa-jh9bt]

@@jimelewa7861 The ranking is based on the percentage of a support department providing services to another support department. Here to find the ranking we first use the cost driver ; Human resources: they provide services to the Administrative department so 10,000/40000 *100 = 25% For the administrative department : human resources use 4000 of their hours, so 4000/ 20000 * 100 = 20% In conclusion, we can say that more human resource services were provided to other support departments and should be allocated first. I hope this was useful :)

[@jeremylaster3280]

your welcome your videos are very helpful.

[@Edspira]

Jeremy, thanks so much!

[@crazyturtle3920]

shouldn't the ranking start with the service department providing the most service to another service department? in that case the ranking should start with Administrative staff and not Human Resources?

[@samhuynh2867]

thank you so much!

[@faded_thoughts]

Could someone please tell me what "Hierarchy stepdown" is?

[@jeremygailmanaois1202]

Wow. Thank youuu. You are very amazing sir...please make a video on fifo/lifo/weighted ave periodic and perpetual method.

[@Edspira]

I got you covered! I have an entire lesson on different inventory methods on the Edspira website. Check it out here: www.edspira.com/lessons/inventory/

[@jeremygailmanaois1202]

Thank you 😊

[@deejaaay7600]

I understand that you never allocate things back, but for administrative staff, you have 10,000 hours towards HR. We just ignore that?

[@sudheat]

Sir this video picture is cluttered, could you please check and fix it

[@patm.7618]

Hi, thank you for this video, =) How do I rank which goes first? for inst: human resource then administrative staff.

[@aa-ot7vn]

Pat M. I’m wondering too, is it because administrative has more hours than HR so we know that we have a pre determination that HR hrs are going into the total Overall hrs in admin?

[@Rose-ol8tu]

How do we rank these ?

[@janlyn622]

If you have 3 services to 2 production, does the same method applies?

[@anannyasaxena7896]

there's a question please someone answer if the admin got 46000 then all of it got alloted to mountaineering and kayaking department then why did you say in the end that admin had got 6000 allocation. or was it just to brief the method ?

[@jeremylaster3280]

Does it matter order that you rank the support departments?

[@Edspira]

The ranking does matter, and this is usually based on the percentage of costs that a support department incurs to support other support departments. The support department with the highest percentage would be allocated first. Good question!

[@angelacui5358]

in your video, the HR is allocated firstly. so it should be allocating Admin first?

[@jeremygailmanaois1202]

@@Edspira oh. Thank you. Can you please make a video on ranking service departments too?Thank you

[@thisuserispanda]

@@angelacui5358 yes that is correct

[@Jabbs248]

what if there were 3 support departments? Would you proceed in the same way, only allocating support department costs to operating department costs for the first support department and only operating departments for the next 2?

[@katherinecarroll6799]

+Anthony Jabbour Yes. It does not matter how many support departments there are- you will only allocate costs to the first that is given and ignore the rest.

[@faithoverfear5148]

You did not explain how the ranking is done

[@DAfycariad]

You rank in accordance to functional importance. Meaning that a company that ranks HR cost allocation extremely important for company wide functions (staying in business due to high costs %) will rank HR #1 and every other acct after that is ranked in lower importance (if that makes sense). Also, he did answer the question: "The ranking does matter, and this is usually based on the percentage of costs that a support department incurs to support other support departments. The support department with the highest percentage would be allocated first. Good question!"

[@muratulutas4811]

Türkiye'den selamlar.