Direct Method: The direct method completely ignores intra-support department services. Instead, this method accounts only for the costs (based off of services) each support department provides to each patient services department. Therefore, only the direct costs of the support departments are allocated to the patient services departments. Because this method only considers one direction of cost allocation flow, it is significantly easier and less costly to apply. However, when intra-support department allocations are not taken into consideration, the results are less accurate. This inaccuracy means the direct method should only be used in small organizations without complex structure that have few resources and limited time. Step-Down Method: …show more content…
While it recognizes intra-support department costs allocated to both support departments and patient services, it does not recognize the full range of interdependencies. This method requires allocation to take place in a specific sequence. First, all the direct costs of the most supportive department (the department which provides the most support to all other departments) are allocated. This department is then closed out because all of its costs have been allocated. Next, the second most supportive department’s costs (now including direct and indirect costs) are allocated. Because the first department has been closed out, the flow of cost allocation only goes in one direction. This process continues until each support department’s costs are allocated. Since the step-down method takes intra-support department cost allocation into consideration, it is more accurate than the direct method. However, because only one direction of cost allocation is taken into consideration, it is still not the most accurate of the four