This document describes and provides an example of the step method for allocating overhead costs across departments. It shows how the costs of service departments like the cafeteria and custodial are allocated to operating departments like machining and assembly in sequential steps. First, the cafeteria's costs are allocated to other departments based on the number of employees. Then, custodial's costs which now include amounts allocated from the cafeteria are allocated to operating departments based on square footage occupied. The result is each operating department being allocated a portion of both service departments' costs.

1. Servizi di Manutenzione e Assistenza
Metodo di allocazione Ponderata dei Costi

2. Operating
Department
(Machining)
Operating
Department
(Assembly)
Step Method
Once a service
department’s costs
are allocated,
other service
department costs
are not allocated
back to it.
Service
Department
(Cafeteria)
Service
Department
(Custodial)

3. Step Method
Service
Department
(Cafeteria)
Service
Department
(Custodial)
Operating
Department
(Machining)
Operating
Department
(Assembly)
Custodial will
have a new
total to allocate
to operating
departments; its
own costs plus
those costs
allocated from
the cafeteria.

4. Step Method Example
Service Departments Operating Departments
Cafeteria Custodial Machining Assembly
Departmental costs
before allocation 360,000$ 90,000$ 400,000$ 700,000$
Number of employees 15 10 20 30
Square feet occupied 5,000 2,000 25,000 50,000
Service Department Allocation Base
Cafeteria Number of employees
Custodial Square feet occupied
We will use the same data used
in the direct method example.

5. Step Method Example
Service Departments Operating Departments
Cafeteria Custodial Machining Assembly
Departmental costs
before allocation 360,000$ 90,000$ 400,000$ 700,000$
Cafeteria allocation ? ? ? ?
Custodial allocation ? ? ?
Total after allocation ? ? ? ?
Allocate Cafeteria costs first since
it provides more service than Custodial.
Allocate Cafeteria costs first since
it provides more service than Custodial.

6. Service Departments Operating Departments
Cafeteria Custodial Machining Assembly
Departmental costs
before allocation 360,000$ 90,000$ 400,000$ 700,000$
Cafeteria allocation (360,000) 60,000 ? ?
Custodial allocation ? ? ?
Total after allocation $ 0 ? ? ?
Step Method Example
$360,000 ×
10
10 + 20 + 30
= $60,000
Allocation base: Number of employees

7. Service Departments Operating Departments
Cafeteria Custodial Machining Assembly
Departmental costs
before allocation 360,000$ 90,000$ 400,000$ 700,000$
Cafeteria allocation (360,000) 60,000 120,000 ?
Custodial allocation ? ? ?
Total after allocation $ 0 ? ? ?
Step Method Example
$360,000 ×
20
10 + 20 + 30
= $120,000
Allocation base: Number of employees

8. Service Departments Operating Departments
Cafeteria Custodial Machining Assembly
Departmental costs
before allocation 360,000$ 90,000$ 400,000$ 700,000$
Cafeteria allocation (360,000) 60,000 120,000 180,000
Custodial allocation ? ? ?
Total after allocation $ 0 ? ? ?
Step Method Example
$360,000 ×
30
10 + 20 + 30
= $180,000
Allocation base: Number of employees

9. Service Departments Operating Departments
Cafeteria Custodial Machining Assembly
Departmental costs
before allocation 360,000$ 90,000$ 400,000$ 700,000$
Cafeteria allocation (360,000) 60,000 120,000 180,000
Custodial allocation (150,000) ? ?
Total after allocation $ 0 $ 0 ? ?
Step Method Example
New total = $90,000 original custodial cost
plus $60,000 allocated from the cafeteria.

10. Service Departments Operating Departments
Cafeteria Custodial Machining Assembly
Departmental costs
before allocation 360,000$ 90,000$ 400,000$ 700,000$
Cafeteria allocation (360,000) 60,000 120,000 180,000
Custodial allocation (150,000) 50,000 ?
Total after allocation $ 0 $ 0 570,000$ ?
Step Method Example
$150,000 ×
25,000
25,000 + 50,000
= $50,000
Allocation base: Square feet occupied

11. Step Method Example
Service Departments Operating Departments
Cafeteria Custodial Machining Assembly
Departmental costs
before allocation 360,000$ 90,000$ 400,000$ 700,000$
Cafeteria allocation (360,000) 60,000 120,000 180,000
Custodial allocation (150,000) 50,000 100,000
Total after allocation $ 0 $ 0 570,000$ 980,000$
$150,000 ×
50,000
25,000 + 50,000
= $100,000
Allocation base: Square feet occupied

12. Reciprocal Method
Interdepartmental
services are given
full recognition
rather than partial
recognition as with
the step method.
Service
Department
(Cafeteria)
Service
Department
(Custodial)
Operating
Department
(Machining)
Operating
Department
(Assembly)
Because of its mathematical complexity,
the reciprocal method is rarely used.