Answer (D) is correct . The three major methods of allocating service department costs, in order of increasing sophistication, are the direct method, the step-down method, and the reciprocal (or simultaneous-equations) method. The direct method is the simplest. It involves allocating all service department costs to production departments without recognizing any service provided by one service department to another. The step-down method is a sequential process that allocates service costs among service as well as production departments. However, once a department’s costs have been allocated, no additional allocations are made back to that department. The reciprocal method uses simultaneous equations to recognize mutual services. The latter method is the most complex.
Answer (A) is incorrect because The direct method does not make allocations to other service departments.
Answer (B) is incorrect because The term variable method is nonsensical.
Answer (C) is incorrect because The reciprocal method recognizes reciprocal interdepartmental service.
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