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Cost Allocation

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The Alex Miller Corporation operates one central plant that has two divisions, the Flashlight Division and the Lamp Division. The following data apply to the coming budget year:

Budgeted costs of the operating the plant for 10,000 to 20,000 hours:
Fixed operating costs per year $240,000
Variable operating costs $10 per hour

Practical capacity 20,000 hours per year

Budgeted long-run usage per year:
Lamp Division 800 hours x 12 months = 9,600 hours per year
Flashlight Division 450 hours x 12 months = 5,400 hours per year

Assume that practical capacity is used to calculate the allocation rates. Further assume that actual usage of the Lamp Division was 700 hours and the Flashlight Division was 400 hours for the month of June.

Required:
a. If a single-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Lamp Division each month? For the Flashlight Division each month?

b. For the month of June, if a single-rate cost-allocation method is used, what amount of cost will be allocated to the Lamp Division? To the Flashlight Division? Assume actual usage is used to allocate operating costs.

c. If a dual-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Lamp Division each month? For the Flashlight Division each month?

d. For the month of June, if a dual-rate cost-allocation method is used, what amount of cost will be allocated to the Lamp Division? To the Flashlight Division? Assume budgeted usage is used to allocate fixed operating costs and actual usage is used to allocate variable operating costs.

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Solution Summary

The solution explains how to calculate the amount of cost allocated using single rate and dual rate.

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See Also This Related BrainMass Solution

Common Cost Allocation at Wal-Mart

Retrieve any report in Wal-Mart that allocates common costs to a division, product, or service. Recast that report with unallocated costs and comment on the usefulness of that revised report.

If you cannot identify specific actual amounts, make a reasonable estimate and apply the tool as if the data were factual.

If you are unable to identify any report with allocated costs, create a report that you think may apply to your organization and treat the data as if it were factual.

Your report should include:

The name and nature of the organization
The activity and time period you used
The inputs you used
Your results
Any implications from your results

Be sure you do the recasting of the report - this means a numerical table must be prepared with your report.

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