Question 2

The Chicago power plant that services all manufacturing departments of MidWest Engineering has a budget for the coming year. This budget has been expressed in the following monthly terms:

Manufacturing	Needed at Practical Capacity	Average Expected Monthly
Department	Production Level (Kilowatt- Hours	Usage (Kilowatt-Hours)
Rockford	10,000	8,000
Peoria	20,000	9,000
Hammond	12,000	7,000
Kankakee	8,000	6,000
Total	50,000	30,000

The expected monthly costs for operating the power plant during the budget year are $15,000, $6,000 variable and $9,000 fixed.

Required:

1. Assume that a single cost pool is used for the power plant costs.

What budgeted amounts will be allocated to each manufacturing department if:

1. the rate is calculated based on practical capacity and costs are allocated based on practical capacity, and

1. the rate is calculated based on expected monthly usage and costs are allocated based

on expected monthly usage?

2.Assume the dual-rate method is used with separate cost pools for the variable and fixed costs. Variable costs are allocated on the basis of expected monthly usage.

Fixed costs are allocated on the basis of practical capacity.

1. What budgeted amounts will be allocated to each manufacturing department?

1. Why might you prefer the dual-rate method?