Budgeted Versus Actual Costs and the Choice of Allocation Base

Learning Objective 2 Understand how the choice between allocation based on budgeted and actual rates and between budgeted and actual usage can affect the incentives of division managers

• budgeted rates provide certainty to users about charges and motivate the support division to control costs
• budgeted usage helps in planning and efficient utilization of fixed resources; actual usage controls consumption of variable resources

In this section, we examine in greater detail the decision about using actual or budgeted costs, and actual or budgeted usage as the allocation base. These choices have a significant impact on the cost allocated to each operating department and the incentives of the operating department managers.