A factory averages total employment of 700 people. The administrative department averages 150 people. The company operates
Question:
A factory averages total employment of 700 people. The administrative department averages 150 people. The company operates a cafeteria with capacity to serve all employees. The cafeteria’s monthly costs are $12,000 plus $2.50 per meal served. In July the factory was closed for retooling. During July, the cafeteria provided 3,200 meals to administrative personnel and 1,000 meals to factory employees.
REQUIRED
A. Using the single-rate method, allocate the cafeteria costs to factory and administration based on actual meals served during July.
B. Using the dual-rate method, allocate the cafeteria costs to factory and administration based on actual meals served during July.
C. List the pros and cons of using the single-rate allocation method.
D. Would the managers of the administrative department prefer the single-rate method or the dual-rate method? Explain.
E. Should the fixed costs for the cafeteria be allocated in July if it causes the administrative department’s costs to exceed its budget?
Step by Step Answer:
A First use the cost function to calculate total cafeteria costs for July Total cafeteria costs 12000 250 x 32001000 22500 Second determine the singlerate allocation per meal Singlerate allocation per meal 22500 32001000 53571 per meal Finally allocate costs using the direct method Allocation to administration 3200 meals x 53571 17143 Allocation to factory 1000 meals x 53571 5357 Total cost allocated 22500 B First determine the fixed and variable allocation rates Fixed cost allocation rate 12000 32001000 28571 per meal Variable cost allocation rate given 250 per meal Allocations to administration Fixed 3200 x 28571 9143 Variable 3200 x 250 8000 17143 Allocation to factory Fixed 1000 x 28571 2857 Variable 1000 x 250 2500 5357 Total cost allocated 22500 The costs allocated in Part B are the same as in Part A This result occurred ONLY because the same allocation base actual number of meals was used to allocate both fixed and variable costs Under the dualrate method different allocation bases are often used for fixed and variable costs However even if the same allocation base is used the dualrate method provides managers with separate rates for fixed and variable costs which can be useful for decision making Alternatively estimated volume of the allocation base may be used for fixed costs while actual volume of the allocation base is used for variable costs See Part E below C Pros for the single ...View the full answer
Cost Management Measuring Monitoring And Motivating Performance
ISBN: 392
2nd Edition
Authors: Leslie G. Eldenburg, Susan K. Wolcott
