Two-stage allocation

Two-stage allocation is an overhead costing method that moves indirect costs to products in two steps. First, costs are assigned to department or activity pools. Second, each pool is charged to products using a pool-specific rate.

Also known asdepartmental allocation

ByHoang TruongUpdated June 30, 2026

See it move

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A three-step flow diagram shows overhead moving in two stages: first, total factory indirect costs are assigned to department pools (for example, Machining receives €80,000) using bases such as floor area or headcount; then, each department pool is applied to products using a departmental rate (€5 per machine hour × 3 hours = €15 per unit). By routing costs through departments before reaching products, two-stage allocation produces more accurate unit costs than a single plant-wide rate, because different departments consume overhead through different drivers.

Where it fits

SubjectCost AccountingAdvancedTopicOverhead Allocation & ABCAdvanced

The formula

LaTeX

r_k = \frac{C_k}{B_k}

Variables

$r_{k}$: Rate for cost pool k (€ per unit of base)
$C_{k}$: Total costs assigned to cost pool k (department or activity) (€)
$B_{k}$: Budgeted volume of pool k's cost driver for the period (hours or units)

First stage: converts each department's or activity pool's costs into a rate per unit of its chosen driver.

LaTeX

OH_j = \sum_k r_k \times b_{jk}

Variables

$O H_{j}$: Total overhead allocated to product j (€)
$b_{j} k$: Units of pool k's driver consumed by product j (hours or units)

Second stage: applies each pool's rate based on how much of that pool's driver the product consumed.