Support departments such as IT, HR and facilities serve the departments that generate revenue. Allocate their costs by usage with the direct, step-down or reciprocal method to see the fully loaded cost of each operating department.
How it works
Allocate support-department costs such as IT, HR and facilities to operating departments using the direct, step-down or reciprocal method, based on each support department’s usage driver.
Direct: support cost × (operating department usage ÷ total operating usage)
Step-down: allocate support departments in order; each goes to all departments not yet closed
Reciprocal: solve T(s) = Direct cost(s) + Σ share of other support costs received;
then allocate each T(s) by usage to every other departmentCommon uses
- Service-line and department profitability
- Hospital cost accounting and Medicare cost report preparation
- Internal chargebacks and transfer pricing
Worked example
The calculator above opens with this example. Change any input to see the results update instantly, or select Reset to return to these figures.
| Departments | Facilities | S | 600,000 IT | S | 450,000 HR | S | 300,000 Surgery | O | 2,400,000 Emergency | O | 1,800,000 Imaging | O | 1,200,000 |
| Usage by support department | Facilities | 0 2,000 1,500 18,000 12,000 6,500 IT | 300 0 400 1,800 1,200 2,300 HR | 40 25 0 180 150 75 |
| Method | Reciprocal (simultaneous) |
| Support costs allocated | $1,350,000 |
| Total cost (check) | $6,750,000 |
| Largest fully loaded department | Surgery |
| Method | Reciprocal |
The reciprocal method fully recognizes services between support departments and is the most accurate.
Interpreting the results
- Choose drivers that reflect how departments consume the service: square feet for facilities, tickets or devices for IT, headcount for HR.
- For step-down, allocate first the support department that serves the most other support departments.
- Medicare cost reports use a step-down allocation, so hospitals often mirror that order for management reporting.
Frequently asked questions
What is the difference between the direct, step-down and reciprocal methods?
The direct method allocates support costs only to operating departments. The step-down method allocates support departments in sequence and recognizes some services between them. The reciprocal method recognizes all services between support departments by solving simultaneous equations.
Which cost allocation method is most accurate?
The reciprocal method is the most accurate because it fully reflects how support departments serve each other. The step-down method is widely used, including in Medicare cost reports, as a practical compromise.
Does the order matter in the step-down method?
Yes. Once a department’s costs are allocated, it receives no further allocations, so the sequence changes the results. A common rule is to start with the support department that provides the most service to other support departments.
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