Service Department Cost Allocation

In accounting, allocate the costs of support service departments to the different departments within the organization that make use of those support services. There are several methods for allocating the costs of support service departments, including the two following methods:

• Direct method
• Step method allocation

Step Method Allocation

Using the step method allocation of department costs, allocate some of the service department costs to other service departments. The step method recognizes that service departments provide services to other service departments. Then it allocates some of the costs accordingly.
In the step allocation method, the service department with the largest percentage of costs going to other services departments allocates its costs to those other services departments first. Once you have allocated all of the first departments costs to the other departments, then the step method moves on to the service department. It moves with the second largest percentage of costs going to other services departments. Then it allocates those costs to the remaining service departments.
This continues in this manner until all the service department costs that are being allocated to other service departments have been allocated. Do not allocate the costs backwards. That is, the second department in the step method process does not allocate any costs to the department that went first.

See Also:
Advantages PEO Services for the Business Owner
COGS and the Balance Sheets- Services Based Business
Cost Driver
Cost Center