Essay about Assignment 4

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CHAPTER 15
ALLOCATION OF SUPPORT-DEPARTMENT COSTS,
COMMON COSTS, AND REVENUES

15-16 (20 min.) Single-rate versus dual-rate methods, support department.

Bases available (kilowatt hours):

Rockford
Peoria
Hammond
Kankakee
Total
Practical capacity
Expected monthly usage
10,000
8,000
20,000
9,000
12,000
7,000
8,000
6,000
50,000
30,000

1a. Single-rate method based on practical capacity: Total costs in pool = $6,000 + $9,000 = $15,000 Practical capacity = 50,000 kilowatt hours Allocation rate = $15,000 ÷ 50,000 = $0.30 per hour of capacity

Rockford
Peoria
Hammond
Kankakee
Total
Practical capacity in hours
Costs allocated at $0.30 per hour
10,000
$3,000
20,000
$6,000
12,000
$3,600
8,000
$2,400
50,000
$15,000

1b. Single-rate method based on expected monthly usage: Total costs in pool = $6,000 + $9,000 = $15,000 Expected usage = 30,000 kilowatt hours Allocation rate = $15,000 ÷ 30,000 = $0.50 per hour of expected usage

Rockford
Peoria
Hammond
Kankakee
Total
Expected monthly usage in hours
Costs allocated at $0.50 per hour
8,000
$4,000
9,000
$4,500
7,000
$3,500
6,000
$3,000
30,000
$15,000
2. Variable-Cost Pool: Total costs in pool = $6,000 Expected usage = 30,000 kilowatt hours Allocation rate = $6,000 ÷ 30,000 = $0.20 per hour of expected usage Fixed-Cost Pool: Total costs in pool = $9,000 Practical capacity = 50,000 kilowatt hours Allocation rate = $9,000 ÷ 50,000 = $0.18 per hour of capacity

Rockford
Peoria
Hammond
Kankakee
Total
Variable-cost pool
$0.20 × 8,000; 9,000; 7,000, 6,000
Fixed-cost pool
$0.18 × 10,000; 20,000; 12,000, 8,000
Total

$1,600

1,800
$3,400

$1,800

3,600
$5,400

$1,400

2,160
$3,560

$1,200

1,440
$2,640

$ 6,000

9,000
$15,000

The dual-rate method permits a more refined allocation of the power department costs; it permits the use of different allocation bases for different cost pools. The fixed costs result from decisions most likely associated with the practical capacity level. The variable costs result from decisions most likely associated with monthly usage.
15-17 (20–25 min.) Single-rate method, budgeted versus actual costs and quantities.

1. a. Budgeted rate = = $115,000/50 trips = $2,300 per round-trip

Indirect costs allocated to Dark C. Division = $2,300 per round-trip 30 budgeted round trips = $69,000

Indirect costs allocated to Milk C. Division = $2,300 per round-trip 20 budgeted round trips = $46,000

b. Budgeted rate = $2,300 per round-trip

Indirect costs allocated to Dark C. Division = $2,300 per round-trip 30 actual round trips = $69,000

Indirect costs allocated to Milk C. Division = $2,300 per round-trip 15 actual round trips = $34,500

c. Actual rate = = $96,750/ 45 trips = $2,150 per round-trip

Indirect costs allocated to Dark C. Division = $2,150 per round-trip 30 actual round trips = $64,500

Indirect costs allocated to Milk C. Division = $2,150 per round-trip 15 actual round trips = $32,250

2. When budgeted rates/budgeted quantities are used, the Dark Chocolate and Milk Chocolate Divisions know at the start of 2009 that they will be charged a total of $69,000 and $46,000 respectively for transportation. In effect, the fleet resource becomes a fixed cost for each division. Then, each may be motivated to over-use the trucking fleet, knowing that their 2009 transportation costs will not change. When budgeted rates/actual quantities are used, the Dark Chocolate and Milk Chocolate Divisions know at the start of 2009 that they will be charged a rate of $2,300 per round trip, i.e., they know the price per unit of this resource. This enables them to make operating decisions knowing the rate they will have to pay for transportation. Each can still control its total transportation costs by minimizing the number of round trips it uses. Assuming that the budgeted rate was
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