What approach is used to account for interrelationships between overhead departments?

The step-down approach is the correct method for accounting for interrelationships between overhead departments because it sequentially allocates service department costs to production departments, while also allowing for some allocation back to other service departments. This method recognizes that service departments often provide services to one another, thus considering their interdependencies.

In the step-down approach, costs are allocated based on a predetermined order of service departments. Initially, the first service department apportions its costs to both the production departments and the remaining service departments. This process continues with each subsequent service department until all costs have been allocated. This method provides a more accurate reflection of the true overhead costs associated with production because it acknowledges the interconnectedness of departments, allowing for a more comprehensive view of costs.

This approach contrasts with other methods that may not fully account for interdepartmental service relationships. For instance, the direct method allocates only to production departments without consideration of interdepartmental interactions, while activity-based costing focuses more on activities and resources rather than the specific allocation of overhead departments. Similarly, cross-functional allocation is not a standard term related to overhead accounting methodologies.