Question

Explain some of the advantages and disadvantages of the single- and dual- rate methods.
Explain advantages and disadvantages og the direct, the step-down and the reciprocal methods.

Answer 1

Direct method

Direct cost allocation method ignores services provided by one support division to another support division. This method is easy to implement, inexpensive and requires a little training.

Step down Method:-

Step-down cost allocation method recognizes the cost of services provided by one support division to another support division prior to allocating cost pool for remaining services to the core divisions. The services rendered by each cost pool to another cost pool are not recognized.

Reciprocal method

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

Single-rate

advantages

1)The single-rate method is less costly to implement

2)It offers user departments some operational control over the charges they bearb)

disadvantages

single-rate method may lead operating department managers to make sub-optimal decisions that are in their own best interest but thatmay be inefficient from the standpoint of the organization.

Dual-rate advantages

(1) The dual-rate method guides department managers to make decisions that benefit both the organization as a whole and each department

(2) Allocating fixed costs based on budgeted usage helps user departments with both short-run and long-run planning because user departments know the costs allocated to them in advance.

Dual-rate disadvantages

(1) The dual-rate method requires managers to distinguish variablecosts from fixed costs, which is often a challenging task.

(2) The dual-rate method does not indicate to operating managers the cost of fixed support department resources used because fixed costs are allocated to operating departments based on budgeted ratherthan actual usage.