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Hello
Could you please explain the difference between the Direct Method and the Step Down Method in cost reapportionment?
If I have understood correctly the ones showed in the lecture should be the Step Down Method.
could you please give me an example of both method?
Is there any advantages or disadvantages of using Direct Method or Step Down Method.
Thanks a lotGabbi
What I show in the lecture is the step down method effectively – you can do it step by step or you can use equations.
The direct method is only an approximation and is not accurate. Therefore we are not interested in the direct method.
Hi John
Thank you very much for your response. I asked the question only because I came across a couple of questions in BPP revision kit.
Two questions asked for the total overheads cost for a department using both methods,Another question:
If we use the step down method, does the order in which the service cost centre overheads are reapportioned is relevant?
If yes, which order should be use?
Thank you
Gabbi
Hi
Yes – I know that there is a BPP question with it in, but it is only the step-down (reciprocal) method that is relevant.
And no – it does not matter which of the service centres is dealt with first. (Try it yourself and you will find you get the same answer whichever one you deal with first 🙂 )
HI John,
Thank you.
If so, just to let everybody else knows that BPP revision Kit says something different.
I will rewrite the question to double check that there was not misunderstanding from me.Question 8.21 BPP Revision Kit
Consider the following statements, regarding the reapportionment of service cost centre overheads to production cost centres, where reciprocal services exit:
1) The direct method results in costs being reapportioned between service cost centres
2) If the direct method is used, the order in which the service cost centre overheads are reapportioned is irrelevant,
3) The step down method results in costs being reapportioned between service cost centres
4) If the step down method is used, the order in which the service cost centre overheads are reapportioned is irrelevant.Which statements(s) is/are correct?
A 1,2 and 4
B 1,3 and 4
C 2 only
D 2 and 3Correct answer D
Explanation:
The direct method results in costs being re-apportioned between production centres (not between service centres) so statement 1 is FALSE. When using he direct method, it doesn’t matter in which order the service overheads are re-apportioned so statement 2 is TRUE. Statement 3 is true but statement 4 is false because the order does matter when using the step-down approach.
Moreover, I think statement 3 is NOT correct as the costs are being reapportioned to the cost centre even though we first reapportioned to the service centre.
Thanks a lot
Gabbi
Statement 3 is correct. Although I understand your point, the cost is reapportioned between service cost centres (whereas with the direct method it is not).
Assuming you have typed it correctly, the BPP are wrong with regard to statement 4. The order in which you reapportion the service centres is not relevant. It does not matter which service centre you deal with first (and as I wrote before, you can try it yourself and whichever one you start with, the final answer will be the same).
Hi
Once again thanks a lot for your help.
As suggested I will try myself. The reason why I have posted the question is to advise the other students who might come across the same questionGabbi
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I think the tutor is wrong here about the order in the step down method. Although the sum of the costs apportioned to the production cost centres will be the same regardless of the which service cost centre you start with, the individual totals for each production cost centre will differ. So in fact BPP is correct in saying D. If you worked through an example as suggested then you would have seen that they did differ.
G
No, I am not wrong.
BPP are at fault mentioning two methods anyway.
The only correct method (and the only method in the syllabus for F2) when there are two service departments working for each other, is the reciprocal method.This can either be done by using equations or by apportioning step-by-step (both methods giving the same answer).
If you choose the second approach and apportion one service centre, then the other, then the first again, and so on, then it makes no difference at all which centre you apportion first – the final answer will be the same.
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