Cost Allocation Methods (2)
Posted on August 22, 2009 - Filed Under Finance
The step-down method, which is shown in the lower section of Figure 6.1, represents a compromise between the simplicity of the direct method and the complexity of the reciprocal method. It recognizes some of the intrasupport department effects that the direct method ignores, but it does not recognize the full range of interdependencies as does the reciprocal method. The step-down method derives its name from the sequential, stair-step pattern of the allocation process, which requires that the allocation takes place in a specific sequence. First, all the direct costs of Human Resources are allocated to both the patient services departments and the other two support departments. Human Resources is then closed out because all its costs have been allocated. Next, Housekeeping costs, which now consist of both direct and indirect costs (the allocation from Human Resources), are allocated to the patient services departments and the remaining support department Administration. Finally, the direct and indirect costs of Administration are
allocated to the patient services departments. The final allocation includes Human Resources, Housekeeping, and Administration costs because a portion of these support costs have been “stepped down” to the Administration department.
The critical difference between the step-down and reciprocal methods is that after each allocation is made in the step-down method, a support department is removed from the process. Even though Housekeeping and Administration provide support services back to Human Resources, these indirect costs are not recognized because Human Resources is removed from the allocation process after the initial allocation. Such costs are recognized in the reciprocal method.
Taken From : HEALTHCARE FINANCE
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[…] illustrations. We will begin with the direct method. As shown in Table 6.2, Kensington Hospital has three revenueproducing patient services departments, or revenue centers : Routine Care, Laboratory, and Radiology. Hospital costs […]