Dual rate cost allocation method example
|
A number of methods used for cost allocation: Support department costs allocation: Common costs allocation: In the single-rate cost allocation method fixed and variable costs are considered as ONE POOL. No difference is recognized between them despite variable costs and fixed costs behave differently. A single cost allocation rate per unit is used for both variable costs and fixed costs. Dual rate cost allocation method categorizes cost into TWO types of cost pools: fixed costs and
variable costs. Variable cost pool and fixed cost pool each have their own appropriate cost allocation rate. This allows a more specific review of costs and leads to more precise cost allocations. For both the single-rate method and the dual-rate methods costs can be allocated basing either on a budgeted rate or actual cost rate. Budgeted cost rate is PREFERRED for cost allocation. Actual cost rate is not recommended and not widely used in practice. Single-rate method vs dual-rate method Advantage of the single-rate method is low implementation costs. Single-rate method doesn’t require detailed analysis to classify the costs into fixed and variable pools. Disadvantage of the single-rate method is that it could lead to managerial decisions favorable for one department, but not efficient for organization as a whole. Advantage of the dual-rate method is that it takes into account behavioral difference of fixed costs and variable costs. Information provided by the dual-rate method favorable for organization as a whole and each division. Disadvantage of the dual-rate method is cost associated with its implementation. Methods to allocate support costs to operating departments:
Direct cost allocation method ignores ant services provided by one support division to another support division. This method is easy to implement, inexpensive and requires a little training.
Step-down cost allocation method recognizes the cost of services provided by one support division to another support division prior to allocating cost pool for remaining services to the core divisions. The services rendered by each cost pool to another cost pool are not recognized.
Reciprocal cost allocation method aimed to adjust budgeted costs to include in divisions’ cost pools cost of mutual services provided by support departments. Methods for common costs allocation (i.e. costs share by two or more divisions):
Under stand-alone cost allocation method information related to each cost object used to determine the cost allocation rate.
Under incremental cost allocation method individual cost objects are ranked and costs are allocated between cost objects using this ranking. Disclaimers: Content sponsored by Carbon Collective Investing, LLC, a registered investment adviser. Registration with the SEC does not imply a certain level of skill or training. Please refer to our Customer Relationship Statement and Form ADV Wrap program disclosure available at the SEC's investment adviser public information website: CARBON COLLECTIVE INVESTING, LLC - Investment Adviser Firm (sec.gov). The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. Carbon Collective does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Carbon Collective’s web site or incorporated herein, and takes no responsibility therefor. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Investments in securities: Not FDIC Insured • No Bank Guarantee • May Lose Value. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and Carbon Collective's charges and expenses. Carbon Collective's internet-based advisory services are designed to assist clients in achieving discrete financial goals. They are not intended to provide comprehensive tax advice or financial planning with respect to every aspect of a client's financial situation and do not incorporate specific investments that clients hold elsewhere. For more details, see our Form CRS, Form ADV Part 2 and other disclosures. Past performance does not guarantee future results, and the likelihood of investment outcomes are hypothetical in nature. Not an offer, solicitation of an offer, or advice to buy or sell securities in jurisdictions where Carbon Collective is not registered. Copyright © 2022 Finance Strategists What is dual rate method of cost allocation?In cost accounting, the dual rate cost allocation method categorizes cost into two types of cost pools: fixed costs and variable costs. You calculate a different cost allocation rate for each cost pool. A more specific review of costs leads to more precise cost allocations.
What is the difference between single and dual rate allocation?The main difference between the single rate and dual rate method is that the single rate method allocates the rate per unit of cost allocation for both variable and fixed cost.
What are examples of allocated cost?Allocated cost types might include fabrication costs, sales costs, project management costs, and associated fixed costs. Another example, a company might allocate or assign the cost of an expensive computer system to the three main areas of the company that uses the system.
Why might you prefer the dual rate method?The dual-rate method may be preferred as it provides a more reined allocaion of the power department costs and allows the facility to use diferent allocaion bases for diferent cost pools.
|
