Illumination Corp operates one central plant that has two divisions, the Flashli
ID: 2447837 • Letter: I
Question
Illumination Corp operates one central plant that has two divisions, the Flashlight Division and the Night Light Division. The following data apply to the coming budget year: Budgeted costs of operating the plant for 2,000 to 3,000 hours: Fixed operating costs per year $500,000 Variable operating costs $800 per hour Budgeted long-run usage per year: Flashlight Division 2,000 hours Night Light Division 1000 hours Practical capacity 4,000 hours Assume that practical capacity is used to calculate the allocation rates. Actual usage for the year by the Flashlight Division was 1,500 hours and by the Night Light Division was 800 hours. 4) If a single-rate cost-allocation method is used, what amount of cost will be allocated to the Flashlight Division? Assume actual usage is used to allocate operating costs. A) $1,247,500 B) $1,300,000 C) $1,487,500 D) $1,387,500 5) If a dual-rate cost-allocation method is used, what amount of cost will be allocated to the Night Light Division? Assume budgeted usage is used to allocate fixed operating costs and actual usage is used to allocate variable operating costs. A) $810,000 B) $765,000 C) $790,000 D) $750,000
Explanation / Answer
1
Calculation of cost allocated to the Flashlight Division If a single-rate cost-allocation method is used:
Budgeted total Fixed Overhead Costs
$ 500,000
Practical capacity hours
4000
Single Allocation rate per hour = $500000 / 4000 hours
$ 125
Actual usage for the year by the Flashlight Division (Hours)
1500
Fixed overhead Cost allocated to the Flashlight Division = 1500 hours *$125=
$ 187,500
Add: Variable overhead Cost allocated to the Flashlight Division = 1500 hours *$800=
$ 1,200,000
Total cost allocated to the Flashlight Division =
$ 1,387,500
2
Calculation of cost allocated to the Night light Division If a dual-rate cost-allocation method is used:
Budgeted total Fixed Overhead Costs
$ 500,000
Practical capacity hours
4000
Allocation rate per hour = $500000 / 4000 hours
$ 125
Budgeted usage for the year by the Night light Division (Hours)
1000
Fixed overhead Cost allocated to the Night light Division = 1000 hours *$125=
$ 125,000.00
Add: Variable overhead Cost allocated to the Night light Division = 800 hours *$800=
640000
Total cost allocated to the Night light Division =
$ 765,000.00
1
Calculation of cost allocated to the Flashlight Division If a single-rate cost-allocation method is used:
Budgeted total Fixed Overhead Costs
$ 500,000
Practical capacity hours
4000
Single Allocation rate per hour = $500000 / 4000 hours
$ 125
Actual usage for the year by the Flashlight Division (Hours)
1500
Fixed overhead Cost allocated to the Flashlight Division = 1500 hours *$125=
$ 187,500
Add: Variable overhead Cost allocated to the Flashlight Division = 1500 hours *$800=
$ 1,200,000
Total cost allocated to the Flashlight Division =
$ 1,387,500
2
Calculation of cost allocated to the Night light Division If a dual-rate cost-allocation method is used:
Budgeted total Fixed Overhead Costs
$ 500,000
Practical capacity hours
4000
Allocation rate per hour = $500000 / 4000 hours
$ 125
Budgeted usage for the year by the Night light Division (Hours)
1000
Fixed overhead Cost allocated to the Night light Division = 1000 hours *$125=
$ 125,000.00
Add: Variable overhead Cost allocated to the Night light Division = 800 hours *$800=
640000
Total cost allocated to the Night light Division =
$ 765,000.00