This method is more  systematic and orderly than least cost method. Here penalties for each column and row of the transportation table are determined, and the row  or  column with  largest penalty is chosen for  allocation. Then the cell with  lowest cost form  the selected row  column  is allocated the  maximum  possible.

After this the  row  or column whose supply or demand is exhausted is exhausted is deleted  and the  penalties are again calculated for the shrunken table. The  procedure continue still full  demand supply  is exhausted. Here penalty of each row column = ( second lowest - lowest  costs of that  row / column.