What is a Stage 1 Allocation?

A stage 1 allocation is the distribution of costs to activities. The concept is used in activity-based costing; it is a preliminary step in the allocation of overhead. A stage 2 allocation involves distributing the costs of activities to cost objects. Using two stages of allocations is intended to result in more accurate overhead allocations. The resulting information can give insights into how overhead costs are being consumed by various activities.

Example of a Stage 1 Allocation

Arthurian Engineering designs suits of armor for the homes of its clients. Its production team typically has to reset a computer-aided sheet metal bending machine 1,000 times per year, as it crafts suits of armor. The total cost to reset this machine sums to $80,000 per year, and the production team had to reset it 2,000 times in the past year. Based on this information, the stage 1 allocation is to divide the number of resets into the total cost, to derive a cost per machine reset of $40.