Which allocation method assumes no benefits between overhead functions?

• A. Step-Down Allocation
• B. Activity-Based Costing
• C. Direct Method
• D. Indirect Allocation

Answer: (C)

The correct choice is grounded in the characteristics of the direct method of allocation. This method simplifies the allocation process by distributing service department costs directly to operating departments without considering any interdepartmental services or benefits. In offering a straightforward approach, the direct method assumes that overhead functions do not provide benefits to each other; therefore, the costs are allocated based solely on predetermined metrics, like usage or space occupied, relative to the operating departments.

By not recognizing any reciprocal services among overhead functions, the direct method can streamline the allocation process, making it easier to understand and implement. This can be particularly beneficial in scenarios where there is a clear, uncomplicated division of costs and services among departments, fostering simpler calculations and more transparent financial insights for decision-making.

In contrast, other allocation methods like step-down allocation involve acknowledging some benefits across departments, as they allow for a sequential allocation process where some service departments' costs are partially allocated back to others. Activity-based costing focuses on a more nuanced analysis based on activities that drive costs, recognizing interdependencies among overhead functions. Indirect allocation reflects a broader category that might not specifically align with the assumptions held by the direct method.