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

Question

Assume that a single cost pool is used for the power plant costs. What budgeted amounts will be allocated to each manufacturing department if (a) the rate is calculated based on practical capacity and costs are allocated based on practical capacity and (b) the rate is calculated based on expected monthly usage and costs are allocated based on expected monthly usage? 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. What budgeted amounts will be allocated to each manufacturing department? Why might you prefer the dual-rate method? 1. 2.

Explanation / Answer

1 Single rate method based on Practical capacity:- Total cost in pool = $       18,000 Practical capacity =           60,000 Killo watt hours Allocation rate = $            0.30 per hour of capacity Livonia Warren Dearbone Westland Total Practical capacity in hours      13,000           29,000      12,000         6,000      60,000 Coat allocated at 0.30 per hour $    3,900 $         8,700 $    3,600 $    1,800 $ 18,000 Single rate method based on Expected monthly usage:- Total cost in pool = $       18,000 Expected monthly usage =           50,000 Killo watt hours Allocation rate = $            0.36 per hour of capacity Livonia Warren Dearbone Westland Total Expected monthly usage in hours      16,000           12,000      18,000         4,000      50,000 Coat allocated at 0.36 per hour $    5,760 $         4,320 $    6,480 $    1,440 $ 18,000 2 Variable Cost pool Total cost in pool =              9,000 Expected monthly usage =           50,000 Killo watt hours Allocation rate = $            0.18 per hour of capacity Fixed Cost pool Total cost in pool =              9,000 Practical capacity =           60,000 Killo watt hours Allocation rate = $            0.15 per hour of capacity Livonia Warren Dearbone Westland Total Variable Cost pool $ 2,880 $ 2,160 $ 3,240 $720 $9,000 Fixed Cost pool $    1,950 $         4,350 $    1,800 $        900 $    9,000 Livonia Warren Dearbone Westland Total Variable Cost pool Expected monthly usage in hours      16,000           12,000      18,000         4,000      50,000 Coat allocated at $0.18per hour $    2,880 $         2,160 $    3,240 $        720 $    9,000 Fixed Cost pool Practical capacity in hours      13,000           29,000      12,000         6,000      60,000 Coat allocated at $0.15 per hour $    1,950 $         4,350 $    1,800 $        900 $    9,000 The dual rate method permits a more refined allocation of the power department costs; it permits the use of different allocation bases for different cost pools. The fixed costs results from decisions most likely associated with the scale of the facility, or the practical capacity level. The variable costs result from decisions most likely associated with monthly usage.

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