Support-department cost allocation: direct and step-down methods. Phoenix Partners provides management consulting services to government and corporate clients. Phoenix has two support departments—Administrative Services (AS) and Information Systems (IS)—and two operating departments— Government Consulting (GOVT) and Corporate Consulting (CORP). For the first quarter of 2009, Phoenix’s cost records indicate the following:

1. Allocate the two support departments’ costs to the two operating departments using the following methods:

 a. Direct method

 b. Step-down method (allocate AS first)

 c. Step-down method (allocate IS first)

2. Compare and explain differences in the support-department costs allocated to each operating department.

3. What approaches might be used to decide the sequence in which to allocate support departments when using the step-down method?

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SUPPORT OPERATING Total AS IS GOVT CORP Budgeted overhead costs before any interdepartment cost allocations Support work supplied by AS (Budgeted head count) Support work supplied by IS (Budgeted computer time) $600,000 $8,756,000 $12,452,000 $24,208,000 $2,400,000 35% 25% 100% 40% 10% 30% 60% 100%