Why do organizations use budgeted rates instead of actual rates to allocate the costs of support departments to each other and to user departments and divisions? Explain

What will be an ideal response?

Answer: The method of using actual rates based on costs realized during the period imposes a level of uncertainty on the user departments.

When allocations are made using budgeted rates, managers of departments to which costs are allocated know with certainty the rates to be used in that budgetary period. Users can determine the amount of service to request. Budgeted rates also help motivate the manager of the support department to improve efficiency. The supplier department bears the risk of unfavorable variances and is aware of factors which may be causing negative variances. In cases where the support department's costs are out of control of the support department manager, the uncontrollable factors can be identified and the supplier department can either be relieved of responsibility for those specific factors or there can be a risk sharing agreement negotiated between the support department and the user departments.