Advantages: (1) The single-rate method is less costly to implement because it avoids the expensive analysis of classifying individual cost items into fixed and variable categories. (2) It offers user departments some operational control over the charges they bear by conditioning the final allocations on the actual usage of support services, rather than on uncertain forecasts of expected demand.
Disadvantage: The single-rate method may lead operating department managers to make suboptimal decisions that are in their own best interest but inefficient from the standpoint of the organization as a whole. This occurs because under the single-rate method, allocated fixed costs of the support department appear as variable costs to the operating departments. In the Robinson Company example, each user department is charged $70 per hour (or $66 per hour based on practical capacity) under the single-rate method where $40 (or $36) relates to the allocated fixed costs of the Materials Management Department. Suppose an external provider offers the Machining Department materials-handling labor services at a rate of $55 per hour, at a time when the Materials Management Department has unused capacity. The Machining Department’s managers would be tempted to use this vendor because it would lower the department’s costs ($55 per hour instead of the $70 per hour internal charge). In the short run, however, fixed costs of the Materials Management Department remain unchanged in the relevant range (between 3,000 hours of usage and the practical capacity of 4,000 hours). Robinson will incur an additional cost of $25 per hour by accepting this offer—the difference between the $55 per hour external purchase price and the internal variable cost of $30 per hour of the Materials Management Department.