Question

Why the Step-Down Method provides a better basis for computing predetermined overhead rates than the Direct-Method ?

Answer 1

Solution:

Direct method allocates support department cost only to production department in the ratio of appropriate allocation base, however practically support department do not provide support only to production department but they provide support to other support department as well. Therefore in order to ensure proper allocation of overhead, step down method first allocate support department cost to production department and other support department, then remaining support department cost is allocated to production department and remaining support department.

Therefore Step-Down Method provides a better basis for computing predetermined overhead rates than the Direct-Method