What is Stage 2 Allocation?

Stage 2 Allocation

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Stage 2 Allocation

Stage 2 Allocation, often referred to as the second-stage allocation, is the next step in a two-stage cost allocation process. After the costs of support (or service) departments have been allocated to operating (or production) departments in Stage 1, the Stage 2 Allocation distributes those combined costs across various products, jobs, or projects. The primary aim is to distribute the overhead costs absorbed by the operating departments to the final cost objects.

The allocation in this stage is typically based on activity bases that best represent the utilization of overhead resources by each product, job, or project. Common allocation bases include machine hours, labor hours, direct labor costs, or any other relevant activity measure.

Example of Stage 2 Allocation

Let’s explore a fresh example for Stage 2 Allocation:

Scenario: Delightful Desserts Inc. operates a bakery that produces two main items: Cakes and Cookies. The company has two main production departments: Baking and Packaging. Additionally, they have two support departments: Cleaning and Quality Control.

Stage 1 Allocation: From the previous allocation, we assume the following costs were allocated to the production departments:

  • Baking: $150,000
  • Packaging: $100,000

Delightful Desserts uses machine hours for the Baking department and labor hours for the Packaging department as the allocation bases for Stage 2 Allocation.

Activity Information:

For the month of April:

  • Cakes required 3,000 machine hours in Baking and 1,500 labor hours in Packaging.
  • Cookies required 2,000 machine hours in Baking and 1,000 labor hours in Packaging.

Stage 2 Allocation:

  1. For Baking Department (Machine Hours):
    Allocation Rate for Baking:
    = Total Allocated Costs / Total Machine Hours
    = $150,000 / (3,000 + 2,000 hours)
    = $30 per machine hour
    Allocated to Cakes:
    = $30 × 3,000 hours
    = $90,000
    Allocated to Cookies:
    = $30 × 2,000 hours
    = $60,000
  2. For Packaging Department (Labor Hours):
    Allocation Rate for Packaging:
    = Total Allocated Costs / Total Labor Hours
    = $100,000 / (1,500 + 1,000 hours)
    = $40 per labor hour
    Allocated to Cakes:
    = $40 × 1,500 hours
    = $60,000
    Allocated to Cookies:
    = $40 × 1,000 hours
    = $40,000

Total Overhead Allocation for April:

  • Cakes: $90,000 (Baking) + $60,000 (Packaging) = $150,000
  • Cookies: $60,000 (Baking) + $40,000 (Packaging) = $100,000

In this example, after allocating the support department costs to the production departments (Stage 1), Delightful Desserts further distributes those costs to its individual products (Cakes and Cookies) during Stage 2, based on relevant activity bases. This ensures a comprehensive and accurate distribution of overhead costs to the final products.

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