First stage allocation

A first stage allocation is the process used to assign overhead costs to activities. This allocation is employed in an activity-based costing system, and is the first step in the eventual allocation of overhead costs to cost objects. For example, the setup cost for a certain machine in the production area is $50,000 per year. Since this machine is set up 100 times per year, the first stage allocation is to calculate that each machine setup (an activity) is assigned a $500 charge (calculated as the $50,000 setup cost divided by 100 setups).