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CA Intermediate · Cost and Management Accounting · Overheads - Absorption Costing Method

A manufacturing company distributes service department costs to production departments using the step method. Which feature distinguishes the step method from the direct redistribution method?

The step method recognises inter-service department services in a sequence. Each service department's cost is spread to the remaining departments, including later service departments, but nothing is returned to a department already closed. Direct redistribution ignores such services, and reciprocal methods allow mutual charging.

  1. AIt ignores service departments' costs completely
  2. BIt recognises services rendered by one service department to another, in sequence, without reciprocal returnCorrect
  3. CIt requires simultaneous equations for all inter-service services
  4. DIt charges service costs directly to cost units

Explanation

In the step method, service departments are ranked and each one's cost is distributed to the other departments, including later service departments, but no cost comes back to a department already distributed. Direct redistribution ignores inter-service services, and simultaneous equations belong to the reciprocal method.

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