Cost of electricity-step-down method and direct method


                                 Direct Method
Service Departments                          Profit Centers

Service Dept.    Electricity     Water        Ingots       Stainless steel Total
Electricity          2500 kwh    2500 kwh  3000 kwh   2000 kwh 10000 kwh
Water                1000 gal      800 gal      1000 gal   2000 gal 4800 gal

The total operating costs of the two service departments are
Electricity $80 million
Water 60 million
Total cost $140 million

Require

• Service department costs are allocated to profit centers using the step-down method and direct method. Water is the first service department allocated. Compute the cost of electricity per kilowatt-hour using step-down method and direct method.

• Critically evaluate this allocation method

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Accounting Basics: Cost of electricity-step-down method and direct method
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