Many Companies Use the Dual-Rate Method of Cost Allocation

question 55

Essay

Many companies use the dual-rate method of cost allocation.
Required:
A.How does the dual-rate method work?
A.The dual-rate method involves creating two overhead rates,one for variable costs and another for fixed costs.The variable costs are normally allocated on the basis of short-run usage of the service department's output;fixed costs are allocated on the basis of long-run usage.
B.Is there any advantage of the dual-rate method over a method that uses a combined,lump-sum single rate? Briefly explain.
B.Yes.When a single rate is used,the cost allocated to a user department may be influenced by the amount of service consumed by another department.For example,a user department's service consumption could remain flat;yet the amount of cost allocated to that department could increase or decrease over previous amounts based solely on actions of other users.Dual rates eliminate this problem.

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Definitions:

Break-Even Units

The quantity of products a company must sell to cover its production costs, with no profit or loss.

Units Sold

The total quantity of a product that has been sold during a particular period, a key measure of business performance.

Absorption Costing

An accounting method that includes all the costs associated with manufacturing a product, including direct, indirect, fixed, and variable costs.

Break-Even Point

The financial point at which total revenues equal total costs, resulting in no net profit or loss.