Single and Dual Charging Rates

A support department may develop a charging rate that is used to charge other departments that use the service. This is similar to an overhead rate. For example, Davis Company's information technology $($IT$)$ department is in charge of purchasing, installing and assisting other departments with computers and other forms of information technology. The IT department may develop a single charging rate by determining all budgeted costs for the year and dividing by the budgeted hours of IT personnel usage.

Suppose the budgeted costs of the Davis Company IT Department for the coming year equal $$240,000$ and budgeted hours of service provided equal $5,000.$

What is the charging rate for the coming year? $fill in the blank $46205$cfdff$9806$b$\_1/$service hour.

If the Payroll Department uses $30$ hours of IT service next year, how much is that department charged by IT$?$ $fill in the blank $46205$cfdff$9806$b$\_2$

Notice that the charging rate is computed using budgeted numbers, but that the actual charge is the predetermined rate times actual usage of IT service hours. At the end of the year, the total amount charged out is compared to the total actual cost of the IT department to determine its efficiency$/$inefficiency$.$

Dual charging rates require the department to separate fixed from variable costs and develop charging rates for each. In this way, the user departments are charged for their original capacity requirement through the fixed allocation and then charged for their actual usage of variable costs through the variable rate.

Suppose that the Davis Company IT Department serves four other departments: Payroll, Factory, Human Resources, and Engineering. When the IT Department was organized, those using departments said they would need the following hours of IT service in a year:

Estimated Hours

of IT Service Percentage of

IT Service

Payroll $1002\mathrm{.}00\%$

Factory $2,00040\mathrm{.}00\%$

Human Resources $1,50030\mathrm{.}00\%$

Engineering $1,40028\mathrm{.}00\%$

Total $5,000100\mathrm{.}00\%$

Davis' IT Department estimated that it would require budgeted fixed cost of $$120,000$ and variable costs of $$20$ per service hour. Calculate the fixed cost to be allocated to each of the four using departments and the variable costs to be assigned using the variable rate. What is the total amount charged to each department using these dual rates? $($Fill in the following table.$)$

Estimated Hours of IT

Service Percentage of IT

Service Fixed IT Cost

Allocated Actual Hours of IT

Service Used Variable Cost

Allocated Using

$$20$ Rate Total IT Cost

Allocated

Payroll $100$ fill in the blank $46205$cfdff$9806$b$\_3\%$ $fill in the blank $46205$cfdff$9806$b$\_430$ $fill in the blank $46205$cfdff$9806$b$\_5$ $fill in the blank $46205$cfdff$9806$b$\_6$

Factory $2,000$ fill in the blank $46205$cfdff$9806$b$\_7\%$ fill in the blank $46205$cfdff$9806$b$\_82,200$ fill in the blank $46205$cfdff$9806$b$\_9$ fill in the blank $46205$cfdff$9806$b$\_10$

Human Resources $1,500$ fill in the blank $46205$cfdff$9806$b$\_11\%$ fill in the blank $46205$cfdff$9806$b$\_121,200$ fill in the blank $46205$cfdff$9806$b$\_13$ fill in the blank $46205$cfdff$9806$b$\_14$

Engineering $1,400$ fill in the blank $46205$cfdff$9806$b$\_15\%$ fill in the blank $46205$cfdff$9806$b$\_161,400$ fill in the blank $46205$cfdff$9806$b$\_17$ fill in the blank $46205$cfdff$9806$b$\_18$

Total $5,000$ fill in the blank $46205$cfdff$9806$b$\_19\%$ $fill in the blank $46205$cfdff$9806$b$\_204,830$ $fill in the blank $46205$cfdff$9806$b$\_21$ $fill in the blank $46205$cfdff$9806$b$\_22$

Why was less charged in total than the budgeted amount of $$240,000?$