Question

In cost accounting, you can use direct, step - down apportionment, double and multiple

apportionment methods. What is the difference and similarity among them and which is the

most effective and which one the most common?

Answer 1

Methods of cost apportionment - differences and similarities.

All of the three methods deals with various departments of the company.

Direct method: In this method, the cost of one department is directly allocated to different department. i.e. service dept cost is allocated to operational dept cost. This contributes to its major disadvantage.They do not consider any service availed from another service dept and hence we cannot find the real or accurate cost incurred for the product.

Step-Down Method : As the name suggests, it is a sequential method. This negates the direct method for the reason that this method considers cost incurred from similar dept. i.e. cost of one service dept to another service dept and not necessarily to operations dept.

The sequential method is that it starts from allocating cost to the service department with highest contribution and then come down to cost allocation to the service dept with least contribution.

Double- Distribution method: This is a combination of direct and step-down method and is also known as reciprocal method. This method enables both production and non-production departments to charge each other for their services. This gives the closest value of opportunity cost. The disadvantage of this method is that, when we try to reduce the cost of one dept, the cost gets higher for another department as the entire cost is allotted among the departments and makes calculation complex

However, the most common and efficient method is the double distribution method as it gives the closest value of cost and is more sophisticated. It considers costs incurred by all departments and between the departments.

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