How is the department to be allocated first usually chosen in the step method?

Unlike direct method, the step method (also known as step down method) allocates the cost of a service department to other service departments as well as to operating departments. The cost allocation under step method is a sequential process. It begins with the allocation of cost of the service department that provides the greatest amount of service to other service departments and ends with the allocation of cost of the service department that provides the least amount of service to other service departments.

Example

The Robert Company uses the step method for allocating the costs of its service departments to operating departments. The company has two service departments and two operating departments. The selected information for the four departments is given below:

The company uses employee hours as the base for allocating the cost of department A and space occupied for allocating the cost of department B.

Required: Allocate the cost of service departments to operating departments using step down method of cost allocation.

Assume the Bee company has two service departments 1 and 2 and two producing departments 3 and 4. Direct costs and other data (in thousands) needed for stage I cost allocations are provided below. Department 1 allocates costs based on cubic feet of service used. Department 2 allocates costs on the basis of floor space occupied.

1. Using the Direct method, the service department costs allocated to department 2 would be

a. Zero
b. (2/16)(10,000) + (1/10)(30,000)
c. (2/14)(10,000)
d. (1/10)(30,000)
e. none of the above.

2. Using the Direct method, the total service department costs allocated to department 3 would be

a. (8/12)(10,000) + (5/7)(30,000)
b. (8/16)(10,000) + (5/10)(30,000)
c. (8/15)(10,000) + (5/9)(30,000)
d. (5/7)(10,000) + (8/12)(30,000)
e. none of the above.

3. Using the Step-down method,

a. the cost of Department 1 should be allocated first.
b. the cost of Department 2 should be allocated first.
c. the cost of both departments 1 and 2 should be allocated simultaneously.
d. both a and b are correct since the service departments are tied, i.e., they both serve one other service department.
e. the answer cannot be determined with the data given.

4. Now ignore your answer to the previous question and assume department 2 is closed or allocated first. Using the Step-down method, the total service department costs allocated to department 3 would be

a. (8/16)(10,000) + (5/10)(30,000)
b. (5/7)(10,000) + (8/12)(30,000)
c. (8/14)(10,000) + (5/7)[30,000 + (2/14)(10,000)]
d. (8/12)[10,000 + (2/9)(30,000)] + (5/9)(30,000)
e. none of the above.

5. Use the reciprocal method and C1 and C2 to represent the total costs of the two service departments after all service department allocations to other service departments. Which equation should be used to represent the cost of department 1?

a. C1 = 10,000
b. C1 = 10,000 + (2/10)(C2)
c. C1 = 10,000 + (2/16)(C1) + (2/10)(C2)
d. C1 = 10,000 + (2/16)(C1) + (2/9)(C2)
e. C1 = 10,000 + (2/16)(C2)

6. Use the reciprocal method and C1, C2 and C3 to represent the total costs of the first three departments after service department allocations. Which equation could be used to accurately determine the cost of department 3?

a. C3 = 300,000 + (8/16)(10,000) + (5/10)(30,000)
b. C3 = 300,000 + (8/14)(10,000) + (5/8)(30,000)
c. C3 = 300,000 + (8/16)(C1) + (5/10)(C2)
d. C3 = 300,000 + (8/14)(C1) + (5/8)(C2)
e. C3 = 300,000 + (8/12)(C1) + (5/7)(C2)

Assume the Clip Company has two service departments S1 (Housekeeping) and S2 (Maintenance) and two producing departments P1 and P2. Direct costs and other data (in thousands) are provided below. S1 allocates costs based on housekeeping labor hours. S2 allocates costs on the basis of maintenance labor hours.

7. Using the Direct method, the service department costs allocated to S1 are

a. 10,000
b. (7/70)(40,000)
c. (7/67)(40,000)
d. (1/33(20,000) + (7/70)(40,000)
e. none of the above.

8. Using the Direct method, the total service department costs allocated to P1 are

a. (10/33)(20,000) + (20/70)(40,000)
b. (10/30)(20,000) + (20/60)(40,000)
c. (10/30)(40,000) + (20/60)(20,000)
d. (10/32)(20,000) + (20/67)(40,000)
e. none of the above.

9. Using the Step-down method,

a. the cost of S1 should be allocated first.
b. the cost of S2 should be allocated first.
c. the cost of S1 and S2 should be allocated simultaneously.
d. Either a and b since the service departments are tied, i.e., they both serve one other service department.
e. it does not matter which service department is allocated first since the reciprocal services are ignored.

10. Now ignore your answer to the previous question and assume S1 is allocated first using the step down method. Then the service cost allocation to S2 is

a. (2/32)(20,000)
b. (2/33)(20,000)
c. (7/70)(20,000)
d. (3/63)(20,000)
e. None of these.

11. Now ignore your answer to the previous questions and assume S2 is allocated first using the Step-down method. Then the total service department costs allocated to P2 is

a. (20/30)(20,000) + (40/60)(40,000)
b. (20/33)(20,000) + (40/70)(40,000)
c. (20/30)[20,000+(7/67)(40,000)] + (40/67)(40,000)
d. (20/32)(20,000) + (40/60)[40,000+(2/32)(20,000)]
e. none of the above.

12. Use the reciprocal method and CS1 and CS2 to represent the total costs of the two service departments after all service department allocations to other service departments. Which equation should be used to represent the cost of S1?

a. CS1 = 20,000
b. CS1 = 20,000 + (7/70)(CS2)
c. CS1 = 20,000 + (2/32)(CS1) + (7/67)(CS2)
d. CS1 = 20,000 + (2/33)(CS1) + (7/70)(CS2)
e. None of these.

13. Use the reciprocal method and CS1, CS2, CP1 and CP2 to represent the total costs of the departments after service department allocations. Which equation could be used to accurately determine the cost of P1?

a. CP1 = 100,000 + (10/30)(CS1) + (20/60)(CS2)
b. CP1 = 100,000 + (10/32)(CS1) + (20/67)(CS2)
c. CP1 = 100,000 + (10/33)(CS1) + (20/70)(CS2)
d. CP1 = 100,000 + (20/70)(CS1) + (10/33)(CS2)
e. None of these.

14. Which first stage allocation method, or methods considers reciprocal services?

a. The direct method.
b. The step-down method.
c. The reciprocal method.
d. a and b.
e. b and c.

15. In first stage cost allocations based on the step-down method, when there is a tie between two departments, the first service department to be closed is

a. chosen arbitrarily.
b. based on the department that provides services to the greatest number of other service departments.
c. based on the department that provides services to the greatest number of producing departments.
d. based on the department that provides the greatest proportion of its service to the department with which it is tied.
e. none of these.

16. From the perspective of the matching concept, the logical way to allocate service department costs is based on

a. The users ability to bear the costs.
b. Fairness and equity.
c. Cause and effect.
d. Arbitrary rules.
e. None of the above.

17. The dual rate method of allocating service department costs refers to

a. solving the service department equations simultaneously.
b. using separate rates for allocating fixed and variable service costs.
c. using step-down method in some departments and the direct method in other departments.
d. using the ability to bear logic in some departments and the cause and effect logic is other departments.
e. none of the above.

18. Allocating service department costs based on budgeted rates rather than actual rates

a. eliminates the problem created when one user department’s consumption of a service affects another department’s service cost allocation.
b. avoids allocating a service department’s idle capacity costs to users.
c. allows an idle capacity variance to be calculated for each service department.
d. a and c.
e. all of the above.

19. When a decision is made concerning whether to sell a joint product at the split off point or process the product beyond that point, the relevant information includes

a. the joint cost allocated to the product.
b. the cost of processing the product beyond the split off point.
c. the difference between the value of the product at the split off point and the sales value it will have after the additional processing.
d. b and c.
e. all of the above.

Assume the October Company has three service departments S1 (Engineering), S2 (Materials Handling) and Maintenance (S3) as well as two producing departments P1 (Forming) and P2 (Finishing). Direct costs and other data are provided below. S1 allocates costs based on engineering hours. S2 allocates costs on the basis of Human resource hours and S3 allocates costs based on Maintenance hours.

20. Using the Direct method, the service department costs allocated to P1 are determined as follows:

a. (1,000/1500)(60,000) + (30/65)(80,000) + (125/175)(100,000)
b. (1,000/1500)(60,000) + (30/100)(80,000) + (125/200)(100,000)
c. (1,000/1500)(60,000) + (30/95)(80,000) + (125/195)(100,000)
d. (500,000/1,100,000)(240,000)
e. none of the above.

21. Using the Step-down method,

a. the cost of S1 should be allocated first.
b. the cost of S2 should be allocated first.
c. the cost of S3 should be allocated first.
d. Either b and c since S2 and S3 departments are tied, i.e., they both serve one other service department.
e. it does not matter which service department is allocated first since the reciprocal services are ignored.

22. Now ignore your answer to the previous question and assume that S3 is allocated first using the step down method. Then the service cost allocation from S3 to S1 is

a. zero
b. (10/185)(100,000)
c. (10/200)(100,000)
d. (10/195)(100,000)
e. None of these.

23. Now ignore your answer to the previous questions and assume that S2 is allocated first using the Step-down method. Then the service costs allocated from S2 to S3 is

a. (5/200)(80,000)
b. (20/100)(80,000)
c. (20/95)(80,000)
d. (20/85)(80,000)
e. none of the above.

24 . Based on the reciprocal method which equation should be used to represent the cost of S1?

a. S1 = zero
b. S1 = 60,000
c. S1 = 60,000 + (10/200)(S2) + (10/100)(S3)
d. S1 = 60,000 + (10/95)(S2) + (10/195)(S3)
e. S1 = 60,000 + (10/100)(S2) + (10/200)(S3)

25. Based on the reciprocal method which equation should be used to represent the cost of S2?

a. S2 = 80,000
b. S2 = 80,000 + (10/200)(S3)
c. S2 = 80,000 + (5/95)(S2) + (10/195)(S3)
d. S2 = 80,000 + (5/100)(S2) + (10/200)(S3)
e. None of these.

26. Based on the reciprocal method which equation should be used to represent the cost of P1?

a. P1 = 500,000 + (1,000/1,500)(S1) + (30/100)(S2) + (125/200)(S3)
b. P1 = 500,000 + (1,000/1,500)(S1) + (30/95)(S2) + (125/195)(S3)
c. P1 = 500,000 + (30/100)(S2) + (125/200)(S3)
d. P1 = 500,000 + (30/95)(S2) + (125/195)(S3)
e. None of these.

27. The logic underlying the choice of methods for service department cost allocations is usually based on

a. accuracy of the subsequent allocations to products.
b. cause and effect relationships.
c. ability to bear the costs.
d. fairness and equity.
e. None of these.

28. The logic underlying the choice of methods for joint cost allocations is usually based on

a. accuracy of the allocations to products.
b. the cause and effect relationships.
c. ability to bear the costs.
d. fairness and equity.
e. None of these.

29. Which service department cost allocation method or methods are acceptable for external reporting?

a. direct method.
b. step-down method.
c. reciprocal method.
d. b or c.
e. all of the above.

30. Which service department cost allocation method or methods is needed for decisions concerning outsourcing services?

a. direct method.
b. step-down method.
c. reciprocal method.
d. b or c.
e. all of the above.

31. Which end of period method or methods of allocating service department costs promotes the calculation of both spending and idle capacity variances within service departments?

a. allocate based on a single actual rate.
b. allocate based on a flexible budget or dual rates.
c. allocate based on a single budgeted rate.
d. b and c.
e. none of these.

32. Which end of period method or methods of allocating service department costs cause idle capacity costs to be allocated to users?

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