Decision Points

Decision	Guidelines
1. When should managers use the dual-rate method over the single-rate method?	The single-rate method aggregates fixed and variable costs and allocates them to objects using a single allocation base and rate. The dual-rate method groups costs into variable-cost and fixed-cost pools, each with its own cost-allocation base and rate. If costs can be separated into variable and fixed costs, the dual-rate method is preferred because it provides better information for making decisions.
2. What factors should managers consider when deciding between allocation based on budgeted and actual rates and budgeted and actual usage?	Using budgeted rates creates certainty about costs allocated to managers of user departments and insulates them from inefficiencies in the supplier department. Using budgeted variable-cost rates and actual usage charges users for resources consumed and promotes control of resource consumption. Charging fixed-cost rates based on budgeted usage helps user divisions with planning and leads to goal congruence when considering outsourcing decisions.
3. What methods can managers use to allocate costs of multiple support departments to operating departments?	Three methods managers can use are the direct, step-down, and reciprocal methods. The direct method allocates a support department’s costs to operating departments without allocating costs to other support departments. The step-down method allocates support-department costs to other support departments and operating departments in a sequential manner that partially recognizes mutual services provided among support departments. The reciprocal method fully recognizes mutual services provided among all support departments.
4. What methods can managers use to allocate common costs to two or more users?	Common costs are the costs of a cost object (such as an activity) that are shared by two or more users. The stand-alone cost-allocation method uses information about each user to determine cost-allocation weights. The incremental cost-allocation method ranks individual users and allocates common costs first to the primary user and then to other incremental users. The Shapley value method considers each user, in turn, as the primary and incremental user.
5. How can contract disputes over reimbursement amounts based on costs be reduced?	Disputes can be reduced by making cost-allocation rules explicit and including them in the contract. These rules should include details such as allowable costs, acceptable cost-allocation bases, and how to account for differences between budgeted and actual costs.
6. What is product bundling, and how can managers allocate revenues of a bundled product to individual products in the bundle?	Bundling occurs when a package of two or more products (or services) is sold for a single price. Revenue allocation of the bundled price is required to evaluate managers of the individual products in the bundle. Revenues can be allocated using the stand-alone method, the incremental method, or the Shapley value method.