The use of a dual-rate cost allocation method recognizes the
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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. Recommended textbook solutions
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 Intermediate Accounting10th EditionDavid Spiceland, Mark W. Nelson, Wayne Thomas 2,204 solutions 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 purpose of using a cost allocation system?A cost allocation methodology identifies what services are being provided and what these services cost. It also establishes a basis for allocating these costs to business units or cost centers based on their appropriate share of such cost.
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.
How the dual rate method is useful to division managers in decision making?15-2 Describe how the dual-rate method is useful to division managers in decision making. The dual-rate method provides information to division managers about cost behavior. Recognizing the different behavior of fixed costs and variable costs is useful in decision making.
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