Question

Templeton’s T’s Ltd. designs and manufactures T-shirts with slogans. The company has two production departments: Sewing and Stamping. The quality of the work completed in each of these departments is managed by the Quality Control department. Quality control normally budgets for 21,000 inspection hours per year with $609,000 of budgeted fixed costs and $399,000 of budgeted variable costs at this level of activity. Sewing’s use of Quality Control is budgeted at 12,000 hours a year while Stamping is budgeted at 9,000 hours.

• In July, Sewing used 1,000 inspection hours and Stamping used 800 hours
• In August, Sewing used 1,200 inspection hours and Stamping used 900 hours.

Up until now, the company’s cost accountant has simply allocated the Quality Control department’s costs to Sewing and Stamping, simply by prorating the total cost to each of the departments based on budgeted usage.

Required

1. How much of Quality Control’s cost was allocated to each department (Sewing and Stamping) for July and August based on the cost accountant’s current method of cost allocation?
   
   
   
   
   
   
   
   
   
2. How much would be allocated if a dual-rate is used with budgeted usage for fixed costs and actual usage for variable costs?
   
   
   
   
   
   
   
   
   
3. Which method is more appropriate in this case? Explain why you chose this method.

Answer 1

1 Current Method of allocation:-

Variable overheads	399000
Fixed Overhead	609000
Total	1008000
Budgeted hours	21000
Overhead absorption rate per hour	48	(1008000/21000)
	July	Aug
Sewing cost control cost	48000	57600
	(48*1000)	(48*1200)
Stamping	38400	43200
	(800*48)	(900*48)

2. Dual method of allocation

	July	Aug
	Variable cost	Fixed overhead	Total	Variable cost	Fixed overhead	Total
Sewing cost	19000	29000	48000	22800	29000	51800
	(19*1000)		(19000+29000)	(19*1200)	29000	(22800+2900)
Stamping	15200	21750	36950	17100	21750	38850
	(19*800)		(15200+21750)	(900*19)		(17100+21750)

Note:- Fixed overhead allocation:-

Fixed overheads allocation
	Annual Total	Per month
Sewing	348,000	29,000
	(609,000/21000*12000)	(348,000/12)
Stamping	261,000	21,750
	(609,000/21000*900,000)	(261000/12)
Total	$609,000	$50,750

Variable overhead allocation :-

Variable cost	399000
Total hours	21000
Per hour variable cost	19

3) Dual rate allocation is more appropriate . The dual rate allocation allocates the cost more precisely . The fixed overheads cost are periodical cost and the same is to be incurred despite of the productions levels in each month. But variable overheads has to be incurred as per the production volume . So dual rate allocaion is more appropriate