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.