Stage 2 allocation definition
/What is a Stage 2 Allocation?
A stage 2 allocation involves the distribution of the costs of activities to cost objects. The costs of activities are calculated in the first stage of allocations. The stage 2 allocation concept is used in activity-based costing, and is designed to improve the accuracy of overhead allocations.
Examples of Cost Objects
Here are several examples of the cost objects that may be the target of a stage 2 allocation:
Output-related cost objects. These include a company’s products and services. The allocation is useful for profitability analysis and price setting.
Operational cost objects. These include departments, machining operations, production lines, and processes. The allocation is useful for tracking the cost of a customer service call or the cost to design a new product.
Business relationship cost objects. These include the costs incurred for a supplier or customer. The allocation is useful for tracking the cost of dealing with another entity.
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Example of Stage 2 Allocation
A manufacturing company has the following departments:
Support Departments
IT Department
Maintenance Department
Production Departments
Assembly
Finishing
It needs to allocate the costs of its support departments through a two-stage allocation.
Stage 1 Allocation (Initial Cost Assignment)
The total overhead costs for the support departments are:
IT Department: $50,000
Maintenance Department: $30,000
These costs were assigned based on actual expenses incurred in each department.
Stage 2 Allocation (Redistribution to Production Departments)
Next, the support department costs need to be allocated to the production departments using an appropriate allocation base. These allocation bases are noted below.
IT costs are allocated based on the number of computers used, which are as follows:
Assembly: 70 computers used
Finishing: 30 computers used
Total: 100 computers used
The resulting allocation of IT costs is as follows:
Assembly: (70 ÷ 100) × $50,000 = $35,000
Finishing: (30 ÷ 100) × $50,000 = $15,000
Maintenance costs are allocated based on machine hours used, which are as follows:
Assembly: 60 machine hours
Finishing: 40 machine hours
Total: 100 machine hours
The resulting allocation of maintenance costs is as follows:
Assembly: (60 ÷ 100) × $30,000 = $18,000
Finishing: (40 ÷ 100) × $30,000 = $12,000
Final Allocated Costs:
At the end of Stage 2 allocation, all support department costs are fully allocated to production departments, ensuring accurate cost accounting for production activities.