Why I Recommend Step Down Method of Cost Allocation

7 Oct No Comments

INTERNAL MEMO:

To the accounting manager,

RE: Why I Recommend Step Down Method of Cost Allocation

Cost allocations methods are geared towards determining the true value and profitability of the business. Close analysis of Direct Method and Step Down Cost Allocation Methods, I advocate for Step Down Cost Allocation Method. This method takes into account service production department offers to other departments thus more resources are set aside for production processes to cut down time leads. Value of each employee is determined and this can be used to determine the salary and input of each employee. Collaborating services from other departments are recognized thus guideline to set aside more costs to departments that are impacting profitably.

Step Down Method works towards taking into account certain costs needed by maintenance and Human Resource department. It does this by measuring credibility of each department using service importance as parameter before allocating resources to products involved. Guidelines on costs involved at each department are set out using this method and departments are ranked as per their influence with Human Resource department ranked high. When allocating costs, costs are set for each department before they are expressed as percentages. Production costs of different products are allocated equally depending on the cost set aside by Human Resource department. This method clearly flows downwards until costs are attached to products without taking chances of overlapping forces. Step Down Method provides more accurate results that guide in cost allocation. This method is faced with little complications but it has all it takes in determining the true value and profitability of the business.




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