The purpose of this paper is to compare and contrast two allotment methodologies: the step-down and the double-distribution allocation methods. Additionally, I will hypothesize two scenarios where the step-down method might be effectively utilized.
The main goal of the step-down method is to reduce expenditure on demanded items. It refers to the sequential allocation of service department costs to other service and operating departments (Ward & Finkler 1999). In this method, allocations start from the service department that provides the greatest amount of service to the departments that provide the least amount of service.
This method ignores self-service, but allows for a partial recognition of reciprocal services. In this method, some service department costs are allocated other service departments (Ward & Finkler 1999). In determining the sequence of allocation, the alternative method can be used to break ties. Additionally, in this method, no costs are reallocated back to the service department once the service department’s costs have been allocated (Ward & Finkler 1999).
The following is an example of a hypothesized scenario where the above method can be utilized: in a hospital where there are several departments and expenses, if the step down method were utilized, rent and utilities would receive the first allocation, followed by the executive office, financial affairs department, the laboratory and the adult and pediatric medicine respectively.
In another illustration is considering another hospital with two service departments and operating departments as indicated in the table below.
Double or multiple distribution cost allocation method is an improvement of the step down method. This method recognizes that resources do not only flow in one direction. Additionally, in the first pass of costs through hierarchy, centers are not closed (McLean 2003). Relatively, in the first pass through the hierarchy, costs are allocated upward appropriately (McLean 2003). However, in the second pass through the hierarchy or several passes for multiple distributions, the centers are closed. This process concludes after all the costs of the organization are allocated to the revenue centers.
Reference:
McLean R. (2003). Financial Management in Health Care Organizations: Delmar series in health services administration, 2nd edition. Stamford, Connecticut: Cengage Learning.
Ward D. M. & Finkler A. S. (1999). Cost Accounting for Health Care Organizations: Concepts and Applications, 2nd edition. Burlington: Jones & Bartlett Learning.
