Question

Describe the cost allocation methods single rate, dual rate and reciprocal methods. Disclose how the methods differ.

Answer 1

• Single-rate method

In the single-rate cost allocation method fixed and variable costs are considered as ONE POOL.

No difference is recognized between them despite variable costs and fixed costs behave differently.

A single cost allocation rate per unit is used for both variable costs and fixed costs.

• Dual-rate method

Dual rate cost allocation method categorizes cost into TWO types of cost pools: fixed costs and variable costs.

Variable cost pool and fixed cost pool each have their own appropriate cost allocation rate.

This allows a more specific review of costs and leads to more precise cost allocations.

For both the single-rate method and the dual-rate methods costs can be allocated basing either on a budgeted rate or actual cost rate.

• Reciprocal method

Reciprocal cost allocation method aimed to adjust budgeted costs to include in divisions’ cost pools cost of mutual services provided by support departments.

Single-rate method vs dual-rate method

Advantage of the single-rate method is low implementation costs. Single-rate method doesn’t require detailed analysis to classify the costs into fixed and variable pools.

Disadvantage of the single-rate method is that it could lead to managerial decisions favorable for one department, but not efficient for organization as a whole.

Advantage of the dual-rate method is that it takes into account behavioral difference of fixed costs and variable costs. Information provided by the dual-rate method favorable for organization as a whole and each division.

Disadvantage of the dual-rate method is cost associated with its implementation.