Question

differentiate between the single rate method and dual-rate method of cost allocation based on the usage of resource

Answer 1

The cost of support departments like maintenance or human resources departments can be allocated to production departments using either single-rate or dual-rate method. In the case of single-rate cost allocation method, a single-rate is calculated to allocate service department costs using the cost drivers like number of employees, size of departments etc. In the case of dual-cost allocation method, support department costs are segregated into variable and fixed cost elements. Variable costs are allocated to other departments on the basis of short-run usage and fixed costs on the basis of long-run average usage. Single-rate method is easy to implement and costs less when compared to dual-rate method but results in bad managerial decisions. The advantage of dual-rate method is that it results in better allocation of costs and sound managerial decisions but a costly proposition to implement.