We present the single-rate method followed by the dual-rate method.
In this method, a combined budgeted rate is calculated for fixed and variable costs:
The table depicts the single-rate method, using fixed and variable costs to calculate a combined budgeted rate. The details of the table are as follows:
Budgeted usage of materials-handling labor-hours: 3,600 hours
Budgeted total cost pool: 144,000 dollars plus the quantity 3,600 hours times 30 dollars per hour: 252,000 dollars
Budgeted total rate per hour: 252,000 dollars divided by 3,600 hours: 70 dollars per hour used
The rate of $70 per hour is used to allocate Materials Management Department costs to the Machining and Assembly Departments. Note that the budgeted rate of $70 per hour is substantially higher than the $30 budgeted variable cost per hour because it includes an allocated amount of $40 per hour (budgeted fixed costs, ) for the fixed costs of operating the facility.
Departments are charged the budgeted rate for each hour of actual use of the central facility. In our example, Robinson allocates Materials Management Department costs based on the $70 per hour budgeted rate and the actual hours the two operating departments use:
The table depicts total costs allocated by the Materials Management Department. The details of the table are as follows:
Machining Department: 70 dollars per hour times 1,200 hours: 84,000 dollars
Assembly Department: 70 dollars per hour times 2,400 hours: 168,000 dollars
Total Materials Management Department costs allocated: 252,000 dollars
In the dual-rate method, managers must choose allocation bases for (1) the variable and (2) the fixed-cost pools of the Materials Management Department. As in the single-rate method, variable costs are assigned based on the budgeted variable cost per hour of $30 for actual hours each department uses. However, fixed costs are assigned based on budgeted fixed costs per hour and the budgeted number of hours for each department. At the budgeted usage of 800 hours for the Machining Department and 2,800 hours for the Assembly Department, the budgeted fixed-cost rate is $40 per hour . Because this rate is charged on the basis of budgeted usage, fixed costs are effectively allocated in advance as a lump sum to the operating departments based on the budgeted use of the materials management facilities.
Under the dual-rate method:
The costs allocated to the Machining Department in 2020 equal:
The table depicts costs allocated to the Machining Department in 2020 under the dual-rate method. The details of the table are as follows:
Fixed costs: 40 dollars per hour times 800 (budgeted) hours: 32,000 dollars
Variable costs: 30 dollars per hour times 1,200 (actual) hours: 36,000 dollars
Total costs: 68,000 dollars
The costs allocated to the Assembly Department in 2020 equal:
The table depicts costs allocated to the Assembly Department in 2020 under the dual-rate method. The details of the table are as follows:
Fixed costs: 40 dollars per hour times 2,800 (budgeted) hours: 112,000 dollars
Variable costs: 30 dollars per hour times 2,400 (actual) hours: 72,000 dollars
Total costs: 184,000 dollars
Total Materials Management Department costs allocated, 68,000 dollars plus 184,000 dollars: 252,000 dollars
Each operating department is charged the same amount for variable costs under the single-rate and dual-rate methods ($30 per hour multiplied by the actual hours used). However, the total costs assigned are different because the single-rate method allocates fixed costs of the Materials Management Department based on actual usage of materials-handling resources by the operating departments, whereas the dual-rate method allocates fixed costs based on budgeted usage.
We next consider the alternative approach of allocating Materials Management Department costs based on the capacity of materials-handling services supplied.