Cost allocation methods

Question 1

Direct method

Answer 1

Ignore interrelationships and treat support departments as if they were serving operating departments only

Question 2

Step-down method

Answer 2

Avoid cross-allocation by allowing one-directional cost allocation flows only

Question 3

Recipriocal method

Answer 3

Integrate all support department interrelationships and find a simultaneous solution for all cost allocation rates

Question 4

Iterative method

Answer 4

Integrate all support department interrelationships by applying the basic cost allocation process in an iterative sequence until all cost has been allocated to operating departaments