Service Cost Allocation CMAPart 1 Example #2: Dual-rate method of allocation: The following information is from the 2010 budget for EZYBREEZY Co. EZYBREEZV has one service department, its Maintenance Department, that serves its Manufacturing and Sales departments. The Maintenance Department has a practical capacity of 5,000 hours of maintenance service available each year. The fixed costs of operating the Maintenance Department (physical facilities, tools) are budgeted at $247,500 per year. The wages for the maintenance people and the supplies they require are the variable costs, and those are budgeted at $25 per hour. Budgeted Maintenance usage by the Manufacturing and Sales departments is as follows: Manufacturing 3,500 hours Sales 1.000 hours Total budgeted usage 4,500 hours Because a dual-rate method is being used, EZVBREEZY selects an allocation base for the variable costs and an allocation base for the fixed costs. The company allocates the variable costs based on the budgeted variable cost per hour ($25) and the actual hours used. They allocate fixed costs based on budgeted fixed costs per hour and the budgeted number of hours for each department (option #1). The actual maintenance hours used by the Manufacturing and Sales departments are as follows: Manufacturing 3,600 hours Sales 1.100 hours Total actual usage 4,700 hours The allocation rate for the fixed cost is $247,500 .;. 4,500 hours, or $55 per hour. The allocation rate for the variable cost is $25 per hour. The amounts allocated to each user department are now: Manufacturing : Fixed Costs: Variable Costs: Total allocated to Manufacturing Sales: Fixed Costs $55 x 1,000 hours Variable Costs: $25 x 1,100 hours Total allocated to Sales Total cost allocated The total amounts allocated to each user department are different under the dual-rate method and the Single-rate method because the fixed costs are allocated based on the budgeted usage under the dual rate method and based on the actual usage under the single-rate method. Under the dual-rate method, the Manufacturing and Sales departments would each be charged for their budgeted fixed allocation even if they do not use the internal Maintenance department. That should discourage the manager of the Manufacturing department from contracting with an outside maintenance service. The examples above use the demand to calculate the allocation rate for the Maintenance Departments costs. The company could instead use the supply of service, i.e., the Maintenance departments practical capacity of 5,000 hours to calculate the allocation rate per hour. When the supply is used to calculate the allocation rate and if 100% of the supply is not budgeted for use by user departments, there will be some unused capacity that will not be allocated. However, if unused capacity is caused by one of the user departments having $55 x 3,500 hours $25 x 3,600 hours
Posted on: Sun, 19 Jan 2014 06:23:01 +0000
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