Many Companies Use the Dual-Rate Method of Cost Allocation

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.