QUESTION E - Cost Allocation

Three restaurants in a downtown area of a large city have decided to share a valet service and parking lot for their customers. The cost of the service and lot is $10,000 per month. The owners of the restaurants need to decide how to divide the $10,000 cost. The actual usage, planned usage, and practical capacity in the month of May was:

Restaurant

Actual Parking Spots Used

Planned Parking Spots

Practical Capacity Parking Spots

Harbourfest

1,500

1,600

2,000

Cove Seafood

1,400

1,300

1,500

David's Dishes

1,300

1,100

1,500

Required

1.Allocate the fixed cost to each restaurant using actual, planned and capacity usage measures.

absolutely

2.In this situation, which method of allocation makes the most sense? Explain why.

Templeton's T's Ltd. designs and manufactures T-shirts with slogans. The company has two production departments: Sewing and Stamping. The quality of the work completed in each of these departments is managed by the Quality Control department. Quality control normally budgets for 21,000 inspection hours per year with $609,000 of budgeted fixed costs and $399,000 of budgeted variable costs at this level of activity. Sewing's use of Quality Control is budgeted at 12,000 hours a year while Stamping is budgeted at 9,000 hours.

In July, Sewing used 1,000 inspection hours and Stamping used 800 hours

In August, Sewing used 1,200 inspection hours and Stamping used 900 hours.

Up until now, the company's cost accountant has simply allocated the Quality Control department's costs to Sewing and Stamping, simply by prorating the total cost to each of the departments based on budgeted usage.

Required

1.

How much of Quality Control's cost was allocated to each department (Sewing and Stamping) for July and August based on the cost accountant's current method of cost allocation?

2.How much would be allocated if a dual-rate is used with budgeted usage for fixed costs and actual usage for variable costs?

3.Which method is more appropriate in this case? Explain why you chose this method.