In this case, a budgeted fixed-cost rate is not calculated. Instead, the budgeted fixed costs of $144,000 of the Materials Management Department are allocated to the Machining and Assembly Departments based on the actual labor-hours used by the Machining and Assembly Departments as shown in Exhibit 16-1, column 4.
Why is the Machining Department allocated $4,000 more of the fixed costs of the Materials Management Department in Case 3, even though its actual usage equals its budgeted usage? Because total fixed costs of $144,000 are now spread over 400 fewer hours of actual total usage. The lower usage by the Assembly Department leads to an increase in fixed costs allocated to the Machining Department. When budgeted fixed costs are allocated based on actual usage, user departments will not know their fixed-cost allocations until the end of the budget period. This method shares the same flaw as methods that rely on the use of actual cost rates rather than budgeted cost rates.
To summarize, there are strong economic and motivational reasons for companies to use the dual-rate allocation procedure described in the previous section.