Biology Forums - Study Force

Landmark Systems Inc. designs and manufactures global positioning navigation systems for all-terrain vehicles and water craft. It has two support departments: Design and Engineering; and, two production departments, Vehicle Systems and Water Craft Systems.

The budgeted level of service relationships at the start of the year was:

   Used by:
   Design   Engineering   Vehicles   Water Craft
Supplied by:            
  Design       0.10   0.40   0.50
  Engineering   0.05       0.35   0.60

Landmark Systems Inc. collects fixed costs and variable costs of each support department in separate pools. The budgeted costs for the year were:

   Fixed-Cost
Pools   Variable-Cost
Pools
Design   $800,000   $960,000
Engineering   $2,200,000   $2,500,000

Support department pools are combined by cost behavior for allocation purposes.

Production statistics (actual) are as follows:

   Vehicles   Water Craft
Design hours   9,000    12,800
Engineering hours   25,600    19,400
Units produced   45,000   28,000

Required:
a.   Allocate the support department variable costs using the dual-rate method. The company policy is to use design and engineering hours as the allocation base for variable costs; and, units produced for fixed costs. (round to the nearest cent)
b.   Allocate the support department variable costs using the reciprocal method.
c.   Comment on the effect from combining the variable cost pools as opposed to considering them separately when applying the allocation methods.

a.   Dual-rate method

   VC Pool ($960,000 + $2,500,000)/(9,000 + 12,800 + 25,600 + 19,400) = $51.80
   Vehicles (9,000 + 25,600) × $51.80 =      $1,172,280
   Water Craft (12,800 + 19,400) × $51.80 =        1,667,960
                     $3,460,240
   
b.   Reciprocal method

   E   =   $2,500,000 +0.10D
   D   =   $960,000 + 0.05E
   E   =   $2,500,000 + 0.10 ($960,000 + 0.05E)
   E   =   $2,596,000 + 0.005E
   0.995E   =   $2,596,000
   E   =   $2,596,000 ÷ 0.995
   E   =    $2,609,045
   D   =   $960,000 + 0.05($2,609,045)
   D   =   $1,090,452
      
   Design   Engineering   Vehicles   Water Craft
VC Pool   $960,000   $2,500,000      
Design (0.10, 0.40, 0.50)   (1,090,452)   109,045   $436,181   $545,226
Engineering (0.05, 0.35, 0.60)   130,452   (2,609,045)   913,166   1,565,427
   $0   $0   $1,349,347   $2,110,653
      
c.   Combining the variable costs pools eliminates the ability to differentiate the cost allocation that results from the vehicles and water craft using support department costs in different proportions.