The Single Rate Cost Allocation Method in Cost Accounting
In cost accounting, the single rate cost allocation method uses one cost rate to dictate the dollars that are allocated from a cost pool to a unit, batch, department, or division. In the case of support departments, the rate allocates dollars to another department or division.
The single rate method doesn’t distinguish between fixed and variable costs. Now, if it strikes you that this kind of allocation doesn’t seem very specific, you’re right.
Of course, more specific cost analysis leads to more precise cost allocations (a recurrent theme in cost accounting). But for now, you use one rate to allocate costs. The principle is incredibly simple: When you compute the single cost allocation rate, you multiply it by actual usage (activity) to apply the cost to the cost object.
Here’s an example of figuring out the cost allocation rate.
Say you manage an online tutoring business. Your instructors serve two markets — high school students and adult continuing education students — so your firm has a high school division and an adult ed division. Both company departments use technology in a big way. Your computer department (called information technology, or IT) installs software, trains staff, backs up data, and repairs computers.
The IT department has fixed costs that include the salary and benefits for five employees and the equipment (hardware and software) they use each day. The department also incurs variable costs, incurred when staff spends time working on technical issues. The variable expense can include hardware and software costs, as well as the expense of outside experts.
|Variable cost per hour||$200|
|Total variable costs||$640,000|
|Total cost pool||$2,640,000|
Your single rate budgeted cost allocation rate is
Single rate budgeted cost allocation rate = cost pool ÷ budgeted hours
Single rate budgeted cost allocation rate = $2,640,000 ÷ 3,200
Single rate budgeted cost allocation rate = $825 per hour
The single cost allocation rate is $825 per hour.