Dual-rate cost allocation

Dual-rate cost allocation splits a support department's costs into a fixed pool charged on budgeted capacity and a variable pool charged on actual usage, so no user department bears cost increases caused by another department's decisions.

ByHoang TruongUpdated July 3, 2026

FrameworkService department cost allocation

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A €200,000 fixed pool is charged out by reserved capacity: Department A holds 40%, so it absorbs €80,000 regardless of what other departments actually use. A separate variable pool is charged at €50 an hour for actual consumption; Department A's 800 hours add €40,000. Together the two pools give Department A a total charge of €120,000.

Where it fits

SubjectCost AccountingAdvancedTopicCost Behaviour & EstimationAdvancedTopicOverhead Allocation & ABCAdvanced

The formula

LaTeX

A^{F}_{j} = \dfrac{CS_{j}}{CS_{\text{total}}} \times FC_{\text{pool}}

Variables

$A_{j}^{F}$: Fixed cost allocation to user department j for the period (€)
$C S_{j}$: Budgeted capacity share reserved for (or provided to) user department j (capacity units)
$C S_{t} o t a l$: Total budgeted capacity of the support department across all users (capacity units)
$F C_{p} oo l$: Total fixed costs in the support department's cost pool (€)

Fixed charges depend only on reserved capacity, so no user department bears a cost increase caused by another department's reduction in actual usage.

LaTeX

A^{V}_{j} = u_{j} \times \dfrac{VC_{\text{pool}}}{U_{\text{total}}}

Variables

$A_{j}^{V}$: Variable cost allocation to user department j for the period (€)
$u_{j}$: Actual units of service consumed by user department j in the period (service units)
$V C_{p} oo l$: Total variable costs in the support department's cost pool (€)
$U_{t} o t a l$: Total actual usage across all user departments in the period (service units)

Total allocation for department j = A^F_j + A^V_j; separating the two pools improves both short-run usage decisions and longer-run capacity planning.