Single and Dual Charging Rates

A support department may develop a charging rate that is used to charge other departments that use the service. This is similar to an overhead rate. For example, Davis Company's information technology (IT) department is in charge of purchasing, installing and assisting other departments with computers and other forms of information technology. The IT department may develop a single charging rate by determining all budgeted costs for the year and dividing by the budgeted hours of IT personnel usage.

Suppose the budgeted costs of the Davis Company IT Department for the coming year equal $196,000 and budgeted hours of service provided equal 4,000.

What is the charging rate for the coming year? $ /service hour.

If the Payroll Department uses 50 hours of IT service next year, how much is that department charged by IT? $

Notice that the charging rate is computed using budgeted numbers, but that the actual charge is the predetermined rate times actual usage of IT service hours. At the end of the year, the total amount charged out is compared to the total actual cost of the IT department to determine its efficiency/inefficiency.

Dual charging rates require the department to separate fixed from variable costs and develop charging rates for each. In this way, the user departments are charged for their original capacity requirement through the fixed allocation and then charged for their actual usage of variable costs through the variable rate.

Suppose that the Davis Company IT Department serves four other departments: Payroll, Factory, Human Resources, and Engineering. When the IT Department was organized, those using departments said they would need the following hours of IT service in a year:

	Estimated Hours of IT Service	Percentage of IT Service
Payroll	80	2.00%
Factory	1,560	39.00%
Human Resources	1,120	28.00%
Engineering	1,240	31.00%
Total	4,000	100.00%

Davis' IT Department estimated that it would require budgeted fixed cost of $108,000 and variable costs of $22 per service hour. Calculate the fixed cost to be allocated to each of the four using departments and the variable costs to be assigned using the variable rate. What is the total amount charged to each department using these dual rates? (Fill in the following table.)

	Estimated Hours of IT Service	Percentage of Estimated IT Service	Fixed IT Cost Allocated	Actual Hours of IT Service Used	Variable Cost Allocated Using $22 Rate	Total IT Cost Allocated
Payroll	80	%	$	50	$	$
Factory	1,560	%		1,760
Human Resources	1,120	%		835
Engineering	1,240	%		1,240
Total	4,000	%	$	3,885	$	$