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\fAcctg 5210 Support Department Cost Allocations Support department cost allocation methods: Lahoma Uniform Company manufactures a variety of uniforms for the armed services. Lahoma has two producing departments, cutting and sewing. Usually, the uniforms are ordered in batches of 100. Two support departments provide support for Lahoma's operating units: maintenance and power. Maintenance costs are allocated based on machine hours and power costs are allocated based on kilowatt-hours. Budgeted data for the coming quarter follow. The company does not separate fixed and variable costs. Overhead costs Machine hours Kilowatt hours Direct labor hours Support Departments Maintenanc Power e $240,000 $380,000 -30,000 20,000 ---- Producing Departments Cutting Sewing $65,000 40,000 18,000 5,000 $87,000 10,000 162,000 30,000 The predetermined overhead rate for cutting is computed on the basis of machine hours; direct labor hours are used for sewing. Recently, the U.S. Air Force has requested a bid on a three-year contract that would supply fatigues to soldiers at a nearby base. Fatigues are uniforms consisting of a long-sleeved shirt and pants made of sturdy olive-drab cotton material. The prime costs for a batch of 100 sets of fatigues total $817.50. It takes 2 machine hours to produce a batch in the cutting department and 50 direct labor hours to sew the 100 uniforms in the sewing department. Lahoma Uniform Company policy is to bid full manufacturing cost plus 25 percent. Instructions 1. Prepare bids (per batch) for Lahoma Uniform Company using each of the following allocation methods: a. Direct method. b. Sequential (step) method, allocating maintenance first. c. Sequential (step) method, allocating power first. Solution: Total bid = $1,627.26 x 1.25 = $2,034 Total bid (maintenance first) = $1,729.10 x 1.25 = $2,161 Total bid (power first) = $1,584.08 x 1.25 = $1,980 Single and dual charging rates: Wilson, Inc., operates a copy business at two different locations. Wilson, Inc., has one support department that is responsible for cleaning, service, and maintenance of its copying equipment. The costs of the support department are allocated to each copy center on the basis of total copies made. During the first month, the costs of the support department were expected to be $400,000. Of this amount, $120,000 is considered a fixed cost. During the month, the support department incurred actual variable costs of $252,000 and actual fixed costs of $148,000. Budgeted and actual activity (copies made) are as follows: Budgeted activity (copies) Actual activity (copies) Copy Center 1 1,200,000 1,000,000 Copy Center 2 800,000 880,000 Required: a. If a single-rate cost-allocation method is used, what amount of support cost will be allocated to each center? b. If a dual-rate cost-allocation method is used, what amount of support cost will be allocated to each center? Solution: Costs Variable costs Fixed costs Total a. Single rate: Budgeted $280,000 $120,000 $400,000 Actual $252,000 $148,000 $400,000 Charging rate = Total Budgeted Cost Total Budgeted Usage Charging rate = $400,000 2,000,000 = $0.20 per copy Cost allocation = charging rate actual copies made Center 1: $.20 1,000,000 copies = $200,000 Center 2: $.20 880,000 copies = $176,000 b. Dual rate: Variable charging rate = $280,000 2,000,000 = $.14 per copy Fixed charging rate = $120,000 2,000,000 = $.06 per copy Variable cost allocation = charging rate actual copies made Center 1: $.14 1,000,000 = $140,000 Center 2: $.14 880,000 = $123,200 Fixed cost allocation = charging rate budgeted number of copies made Center 1: $.06 1,200,000 = $ 72,000 Center 2: $.06 800,000 = $ 48,000 Total cost allocated to Center 1: $140,000 + $72,000 = $212,000 Total cost allocated to Center 2: $123,200 + $48,000 = $171,200