. Jug City, Inc. has two divisions within its one central plant: Forming Divisio
ID: 2712603 • Letter: #
Question
. Jug City, Inc. has two divisions within its one central plant: Forming Division and the Kilning Division. The following data apply to the coming budget year:
Budgeted costs of operating the plant for 2,000 to 3,000 hours:
Fixed operating costs per year 250,000
Variable operating costs per year $400 per hour
Budgeted long-run usage per year:
Forming Division 2,000 hours
Kilning Division 1,000 hours
Practical capacity 4,000 hours
Assume that practical capacity is used to calculate the allocation rates. Forming Division had actual usage for the year at 1,500 hours and the Kilning Division had 800 hours.
Requirements:
a) If dual-rate allocation method is used, what amount will be allocated to the both divisions?
b) Within this scenario, how would single-rate allocation differ from dual-rate?
Explanation / Answer
a) CALCULATION OF AMOUNT TO BE ALLOCATED TO BOTH DIVISION IF DUAL RATE ALLOCATION METHOD IS USED
BUDGETED FIXED COST ALLOCATION RATE IS MULTIPLIED BY BUDGETED USAGE
BUDGETED FIXED COST ALLOCATION RATE=FIXED OPERATING COST PER YEAR/PRACTICAL CAPACITY
=$2,50,000/4,000 HOURS=$62.5
BUDGETED VARIABLE COST ALLOCATION RATE IS MULTIPLIED BY ACTUAL USAGE
BUDGETED VARIABLE COST ALLOCATION RATE=$400
b) IN SINGLE-RATE ALLOCATION ONE RATE IS USED TO ALLOCATE COST.IT DOEST NOT DISTINGUISH BETWEEN FIXED COST AND VARIABLE COST
FIXED COST =$2,50,000
VARIABLE COST=$400 PER HOUR
PRACTICAL CAPACITY=4,000
TOTAL VARIABLE COST=4,000 HOURS*$400=$16,00,000
TOTAL COST=$2,50,000+$16,00,000=$18,50,000
SINGLE ALLOCATION RATE=TOTAL COST/PRACTICAL CAPACITY=$18,50,000/4,000 HOURS=$462.5
FIXED ALLOCATION RATE BUDGETED USAGE HOURS BUDGETED FIXED COST($) FORMING DIVISION $62.5 2,000 1,25,000 KILNING DIVISION $62.5 1,000 62,500Related Questions
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