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 fixed 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 fixed costs using the reciprocal method.
c. Which method is preferable? Justify your answer.
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