Allocating Support Department Costs Using the Single-Rate and Dual-Rate Methods

Learning Objective 1 Distinguish the single-rate method from the dual-rate method

• one rate for allocating costs in a cost pool
• two rates for allocating costs in a cost pool—one for variable costs and one for fixed costs

Companies distinguish operating departments (and operating divisions) from support departments. An operating department, also called a production department, directly adds value to a product or service. Examples are manufacturing departments where products are made. A support department, also called a service department, provides the services that assist other internal departments (operating departments and other support departments) in the company. Examples of support departments are information systems, production control, materials management, and plant maintenance. Managers face two questions when allocating the costs of a support department to operating departments or divisions: (1) Should fixed costs of support departments, such as the salary of the department manager, be allocated to operating divisions? Most companies believe that fixed costs of support departments should be allocated because these fixed costs are needed to provide operating divisions with the services they require. (2) If fixed costs are allocated, should variable and fixed costs of the support department be allocated in the same way? There are two approaches to allocating support-department costs: the single-rate cost-allocation method and the dual-rate cost-allocation method.

Single-Rate and Dual-Rate Methods

The single-rate method does not distinguish between fixed and variable costs. It allocates costs in each cost pool (support department in this section) to cost objects (operating departments in this section) using the same rate per unit of a single allocation base. By contrast, the dual-rate method separates support department costs into a variable-cost pool and a fixed-cost pool, and allocates each pool using a different cost-allocation base. For both the single-rate method and the dual-rate method, managers can use a budgeted rate or the eventual actual cost rate to allocate support-department costs to operating departments. Using the actual cost rate is neither conceptually preferred nor widely used in practice (we explain why in the next section). Accordingly, we illustrate the single-rate and dual-rate methods using budgeted rates.

The Robinson Company manufactures and installs specialized machinery for the paper-making industry. In Chapter 4, Robinson collected all manufacturing overhead costs in a single cost pool and used direct manufacturing labor-hours to allocate manufacturing overhead to jobs. In this chapter, we present a more detailed accounting system to take into account the different operating and service departments within Robinson’s manufacturing department.

Robinson has two operating departments—the Machining Department and the Assembly Department—where specialized machinery is produced, and three support departments—Plant Administration, Engineering and Production Control, and Materials Management—that provide services to the operating departments.

• The Plant Administration Department is responsible for managing all activities in the plant. Costs incurred in this department support supervision activities of the other departments.
• The Engineering and Production Control Department costs support all the engineering activity in the other departments.
• The Materials Management Department is responsible for managing and moving materials and components required for different jobs. Each job at Robinson requires small quantities of unique components to be machined and assembled. Materials Management Department costs vary with the number of material-handling labor-hours incurred in a department.

The specialized machinery that Robinson manufactures does not go through the service departments and so the costs of the service departments must be allocated to the operating departments to determine the full cost of making the specialized machinery. Once costs are accumulated in the operating departments, they can be allocated to the different machines manufactured. Different jobs need different amounts of machining and assembly resources. Overhead costs are allocated to machines produced based on machine-hours in the Machining Department and assembly labor-hours in the Assembly Department.

We first focus on the allocation of the Materials Management Department costs to the Machining Department and the Assembly Department. Budgeted and actual information for the Materials Management Department in 2020 follows:

The budgeted rates and allocations of Materials Management Department costs can be computed based on either (1) the demand for (or usage of) materials-handling services or (2) the supply of materials-handling services.