Question

What are the advantages or disadvantages of using budgeted vs actual allocation rates?

Answer 1

Advantages of budgeted cost-allocation:

-- The budgeted rates are not be affected by department's inefficiencies.

-- The managers of the supplier division are motivated for enhancing the efficiency

-- Management are aware of the costs in advance, thus can be flexible to make more choices and other departments on the cost allocation.

-- The allocated cost to a specific user department would not depend on the quantity of resources used by other user departments

Disadvantages of budgeted cost-allocation:

-- The manager of the supplier division bears the risk of cost of unfavorable variances

Advantages of actual cost-allocation rates:

-- When a company allocates using the actual allocation cost, the user-department managers are not held responsible for costs beyond their control

Disadvantages of actual cost-allocation rates:

--When actual costs the supplier division is not aware of the allocated amount until the accounting period

-- The manager is not aware of costs in advance; thus could not factor them into ongoing operating choices