Step-down method

Step-down method ranks service departments and closes each in turn, allocating its costs to all remaining departments; it partially recognises inter-department services — more than the direct method but less fully than the reciprocal.

ByHoang TruongUpdated July 3, 2026

FrameworkService department cost allocation

See it move

Loading infographic...

The step-down method ranks service departments, often by the size of services each provides to the others. It closes the highest-ranked department first, spreading its full accumulated cost across every department still open. That department then receives no further allocations, and the process repeats down the ranking until every service department has closed and all costs land in production departments.

Where it fits

SubjectCost AccountingAdvancedTopicOverhead Allocation & ABCAdvanced

The formula

LaTeX

A_{k \to j} = \dfrac{u_{j}}{U_{k}} \times TC_{k}

Variables

$A_{k \to j}$: Cost allocated from service department k to department j in this sequential step (€)
$u_{j}$: Units of service department k's output consumed by department j (service units)
$U_{k}$: Total output of department k consumed by all departments not yet closed in this sequence (service units)
$T C_{k}$: Total accumulated cost of department k at this step (own budget plus any prior allocations received) (€)

Applied in rank order; once a department is closed it receives no further allocations regardless of services it provides to remaining departments.

Check yourself

PracticeCORE

A printing company allocates service department costs using the step-down method, ranking the maintenance department first. Which of the following is a recognised limitation of this approach?

Select an answer to check your understanding.