Suggested languages for you:

Americas

Europe

Problem 2

# Describe how the dual-rate method is useful to division managers in decision making.

Expert verified
The dual-rate method is a cost allocation method that distinguishes between variable and fixed costs, allocating variable costs based on usage and fixed costs based on capacity. This method is useful to division managers in decision-making as it provides accurate and transparent cost allocations, enabling them to identify the impact of their decisions on both variable and fixed costs. It encourages accountability and efficient use of resources, serves as a performance evaluation tool, and supports continuous improvement by identifying areas for cost reduction and operational improvement.
See the step by step solution

## Step 1: Introduction to Dual-Rate Method

The dual-rate method is a cost allocation method used in business management, particularly in organizations with multiple departments or divisions. It distinguishes between variable and fixed costs, allocating variable costs based on usage and fixed costs based on capacity. The dual-rate method provides better transparency and accountability in cost allocation, enabling division managers to make more informed and accurate decisions.

## Step 1: Identifying Variable and Fixed Costs

Firstly, identify variable and fixed costs within the organization. Variable costs are those that change with the level of production or activity, whereas fixed costs remain consistent regardless of the production or activity level. Common examples of variable costs include raw materials, labor costs, and utility expenses, while fixed costs might include rent, insurance, and salaries of managerial staff.

## Step 2: Allocating Variable Costs

Once variable and fixed costs have been identified, allocate variable costs to each division based on their usage. This can be done using various methods, such as direct labor hours, machine usage hours, or the number of units produced. By allocating variable costs based on usage, division managers gain a clear understanding of how their activities and decisions impact the overall costs of the organization.

## Step 3: Allocating Fixed Costs

Next, allocate fixed costs to divisions based on capacity or predetermined rates. This part of the dual-rate method focuses on dividing fixed costs in a manner that reflects each division's contribution to the organization and ensures that each division bears its share of the overall fixed costs. In this way, division managers understand the need to manage their operations efficiently to minimize the fixed costs allocated to them.

## Step 4: Analyzing Cost Allocations

Once variable and fixed costs have been allocated to each division, managers can analyze the results and make informed decisions. The dual-rate method provides valuable insights into the areas where costs can be reduced, enabling division managers to prioritize resources, identify inefficiencies, and take corrective actions where necessary.

## Step 6: Benefits of Dual-Rate Method to Division Managers

In conclusion, the dual-rate method is useful to division managers in decision-making for several reasons: 1. It distinguishes between variable and fixed costs, providing more accurate and transparent cost allocations. 2. It enables division managers to identify the impact of their decisions on both variable and fixed costs. 3. It encourages accountability and efficient use of resources, as division managers are held responsible for costs allocated to their divisions. 4. It can be used as a performance evaluation tool, as cost allocations can be compared to budget targets or industry benchmarks. 5. Finally, the dual-rate method supports continuous improvement, as division managers can use the cost allocation data to identify areas for cost reduction and overall operational improvement.

We value your feedback to improve our textbook solutions.

## Access millions of textbook solutions in one place

• Access over 3 million high quality textbook solutions
• Access our popular flashcard, quiz, mock-exam and notes features

## Join over 22 million students in learning with our Vaia App

The first learning app that truly has everything you need to ace your exams in one place.

• Flashcards & Quizzes
• AI Study Assistant
• Smart Note-Taking
• Mock-Exams
• Study Planner