Marvelous Motors is a small motor supply outlet that sells motors to companies that make various small motorized appliances. The fixed operating costs of the company are $300,000 per year. The controlling shareholder, interested in product profitability and pricing, wants all costs allocated to the motors and wants to review the company status on a quarterly basis. The shareholder is trying to determine whether the costs should be allocated each quarter based on the 25% of the annual fixed operating costs ($75,000) or by using an annual forecast budget to allocate the costs. The following information is provided for the operations of the company:
Forecast Actual
Sales for First Quarter 5,000 4,850
Sales for Second Quarter 8,000 7,900
Sales for Third Quarter 8,000 8,125
Sales for Fourth Quarter 3,000 3,125
Required:
a. What amount of fixed operating costs are assigned to each motor by quarter when actual sales are used as the allocation base and $75,000 is allocated?
b. How much fixed cost is recovered each quarter under requirement a.?
c. What amount of fixed operating costs are assigned to each motor by quarter when forecast sales are used as the allocation base and the rate is calculated annually as part of the budgetary process?
d. How much fixed cost is recovered each quarter under requirement c.?
e. Which method seems more appropriate in this case? Explain.
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