Question

how does the managerial accountant determine the department sequence in the step-down method? How are ties handled?

Answer 1

The sequence of allocation generally starts with the service department that has incurred the greatest costs. After this department’s costs have been allocated, the service department with the next highest costs has its costs allocated, and so forth until the service department with the lowest costs has had its costs allocated. Costs are not allocated back to a department that has already had all of its costs allocated.An alternative approach is to start with the service department that provides the highest percentage of its’ service to other service departments. In determining the sequence of allocations, ties can be broken by using the alternative approach. If there is still a tie, then choose the department with the largest dollar amount of service provided to the other service departments. In the step-down method, no costs are allocated (or reallocated) back to a service department once the service department’s costs have been allocated.

The step-down method is accomplished in two steps. In the first step, a set of equations is developed to represent the relationships between the service departments and the other departments, i.e., both sets of equations [1] and [2]. Then the equations for the service departments [1] must be solved before the allocations to the producing departments [2] can be completed. The service department equations reflect the fact that the number of allocations to each service department changes as the departments are closed in sequence. If there are "n" service departments numbered according to the sequence in which they are closed, then there would be no allocations to the first service department closed, therefore S₁ = D₁; only one allocation to service department 2, therefore S₂ = D₂ + K_1,2; two allocations to service department 3, therefore S₃ = D₃ + K_1,3 + K_2,3 and finally n-1 allocations to the last (nth) service department.