Consider the Following Statements About the Step-Down Method of Service

question 76

Multiple Choice

Consider the following statements about the step-down method of service department cost allocation:
I. Under the step-down method, all service department costs are eventually allocated to production departments.
II. The order in which service department costs are allocated is important.
III. After a service department's costs have been allocated to other departments, no costs are re-circulated back to that service department.
Which of the above statements is (are) correct?

• A) I only.
• B) II only.
• C) I and II.
• D) I and III.
• E) I, II, and III.

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Definitions:

Risk-Free Asset

An asset that supposedly carries no risk of financial loss and is expected to return its full value along with known interest or dividends.

Risky Asset

A financial instrument whose future returns are uncertain and subject to a wide variety of outcomes.

Capital Allocation Line

A graphical representation used in finance to show possible rates of return for portfolios with different levels of risk.

Lending Rate

The interest rate charged by banks on loans extended to clients.