Inc. is a producer of premium chocolate based in Palo Alto.
For 2017, the trucking fleet had a practical capacity of 45 round-trips between the Palo Alto plant and the two suppliers. It recorded the following information:
More Info The company has a separate division for each of its two products: dark chocolate and milk chocolate. Chocolat purchases ingredients from Wisconsin for its dark chocolate division and from Louisiana for its milk chocolate division. Both locations are the same distance from Chocolat's Palo Alto plant. Chocolat Inc. operates a fleet of trucks as a cost center that charges the divisions for variable costs (drivers and fuel) and fixed costs (vehicle depreciation, insurance, and registration fees) of operating the fleet. Each division is evaluated on the basis of its operating income. Data Table Budgeted Actual $ 110,250 $ 80,000 Costs of truck fleet Number of round-trips for dark chocolate division (Palo Alto plant - Wisconsin) Number of round-trips for milk chocolate division (Palo Alto plant - Louisiana) 30 30 15 10 Requirement 1. Using the single-rate method, allocate costs to the dark chocolate division and the milk chocolate division in these three ways. a. Calculate the budgeted rate per round-trip and allocate costs based on round-trips budgeted for each division. The budgeted rate per round-trip is This translates to indirect costs allocated to the dark chocolate division for and milk chocolate division for b. Calculate the budgeted rate per round-trip and allocate costs based on actual round-trips used by each division. The budgeted rate per round-trip is This translates to indirect costs allocated to the dark chocolate division for and milk chocolate division for c. Calculate the actual rate per round-trip and allocate costs based on actual round-trips used by each division. The actual rate per round-trip is This translates to indirect costs allocated to the dark chocolate division for and milk chocolate division for Requirement 2. Describe the advantages and disadvantages of using each of the three methods in requirement 1. When budgeted rates/budgeted quantities are used, the dark chocolate and milk chocolate divisions know at the start of 2017 that they will be charged a total of for transportation of dark chocolate and for transportation of milk chocolate. In effect, the fleet resource becomes a cost for each division. This type of cost may motivate the managers to the trucking fleet. This enables them to make operating decisions knowing the When budgeted rates/actual quantities are used, the dark chocolate and milk chocolate divisions know at the start of 2017 that they will be charged a rate they will have to pay for transportation. Each division can still control its total transportation costs by Assuming that the budgeted rate was based on honest estimates of their annual usage, this method will also provide an estimate of the The use of actual costs/actual quantities makes the costs allocated to one division a function of the actual demand of other users. In 2017, the actual usage was the 45 trips budgeted. The dark chocolate division used it had budgeted. Because the milk chocolate division's actual trips were the budgeted trips, the dark chocolate division bears a proportionately share of the fixed costs. Would you encourage Chocolat Inc. to use one of these methods? Explain and indicate any assumptions you made. Of the three single-rate methods suggested in this problem, the may be the best one to use. (The management of Chocolat, Inc. would have to ensure that the managers of the dark chocolate and milk chocolate divisions do not systematically overestimate their use of the fleet division in an effort to drive down the rate)
