Pro rata is a Latin term that means in proportion. Pro rata is related to prorate, a term used in cost accounting.
To illustrate the term pro rata, let’s assume that a company’s standard costing system has an unfavorable materials price variance of $400,000. If that amount is significant, the company will prorate the $400,000 to its inventory and to its cost of goods sold. Let’s also assume that the proration will be based on the company’s $1 million of standard materials costs in its inventories and $9 million of standard materials costs in its cost of goods sold. On this basis the inventories’ pro rata share of the variance will be $40,000 ($1 million divided by the total of $10 million = 10% times the $400,000 variance). The pro rata share of the variance assigned to the cost of goods sold will be $360,000 ($9 million divided by $10 million = 90% times the $400,000 variance).
