Question

The CHOAM Company uses the step-down method to allocate its support departments (A, B, and C) costs to production departments (X and Y). The overhead costs of support Department A are to be allocated first, followed by the costs of B, and then those of C. The distribution of services is as follows:

Services Supplied	To A	To B	To C	To X	To Y
From A	―	10%	50%	20%	20%
From B	40%	―	15%	30%	15%
From C	25%	25%	―	20%	30%

The percentage of B's costs that should be allocated to Y is closest to:

a.	5%
	b.	15%
	c.	33⅓%
	d.	25%

The percentage of C's costs that should be allocated to B is closest to:

	a.	0%
	b.	10%
	c.	20%
	d.	33⅓%

Answer 1

In the step down method, when a department's cost is allocated to other departments then there will be no allocation of cost of other departments back to the first department of which cost is first distributed.

Here Cost Of A is first allocated to Department B, C X and Y.
Then Cost of B is allocated to Department C, X and Y.
In last Cost of C is allocated to Department X and Y.

a). Percentage of B's costs that should be allocated to Y is closest to:
B's Cost is allocated to C, X and Y in the ratio 15% , 30% and 15% respectively.
Total of all percentage = 15% + 30% + 15% = 60%

B's cost allocated to Y in percentage = 15% / 60% = 25%
Hence the answer is d). 25%

b). Percentage of C's costs that should be allocated to B is closest to:
Answer is a). 0%.
It is because C's cost is not to be allocated back to Department B as per step down method.