Question

Indulgence Inc. is a producer of premium chocolate based in Palo Alto. The company has a separate division for each of its two​ products: dark chocolate and milk chocolate. Indulgence purchases ingredients from Wisconsin for its dark chocolate division and from Louisiana for its milk chocolate division. Both locations are the same distance from Indulgence​'s Palo Alto plant. IndulgenceInc. operates a fleet of trucks as a cost center that charges the divisions for variable costs​ (drivers and​ fuel) and fixed costs​ (vehicle depreciation,​ insurance, and registration​ fees) of operating the fleet. Each division is evaluated on the basis of its operating income. For 2013​, the trucking fleet had a practical capacity of 70

​round-trips between the Palo Alto plant and the two suppliers. It recorded the following​information:

	Budgeted	Actual
Costs of truck fleet	$164,500	$130,000
Number of round-trips for dark chocolate
division (Palo Alto plant - Wisconsin)	40	40
Number of round-trips for milk chocolate
division (Palo Alto plant - Louisiana)	30	25

1.	Using the​ single-rate method, allocate costs to the dark chocolate division and the milk chocolate division in these three ways.
	a. Calculate the budgeted rate per​ round-trip and allocate costs based on​round-trips budgeted for each division. b. Calculate the budgeted rate per​ round-trip and allocate costs based on actual​round-trips used by each division. c. Calculate the actual rate per​ round-trip and allocate costs based on actual​round-trips used by each division.
2.	Describe the advantages and disadvantages of using each of the three methods in requirement 1. Would you encourage Indulgence Inc. to use one of these​ methods? Explain and indicate any assumptions you made.

Answer 1

1. Total Budgeted Cost = $ 164,500

Total Number of trips= 40+30 = 70

Therefore, budgeted rate per round trip= $ 164,500/ 70

i.e. $ 2,350 per round trip

Total Actual cost= $ 130,000

Total number of trips= 40+25=65

Therefore, actual cost per round trip= $ 130,000/ 65

i.e. $ 2,000

1. Budgeted rate per round trip= $ 2,350

Cost allocations

1. Dark Chocolate Division= $ 2,350* 40= $94,000
2. Milk Chocolate Division= $ 2,350* 30= $70,500

1. Budgeted rate per round trip= $ 2,350

Cost allocations

1. Dark Chocolate Division= $ 2,350* 40= $94,000
2. Milk Chocolate Division= $ 2,350* 25= $58,750

1. Actual rate per round trip= $ 2,000

Cost allocations

1. Dark Chocolate Division= $ 2,000* 40= $80,000
2. Milk Chocolate Division= $ 2,000* 25= $50,000

1. A) The advantages for using budgeted rate per round trip and allocation also on budgeted costs then we can actually predict the expenses that we will incur but the biggest disadvantage is we have no relation to actual costs.

B) The advantage of budgeted over actual costs is that we know how much actually the budget would have been allocated on the basis of actual facts but the disadvantage is the actual budget is known only after the complete time period is over so we cannot properly allocate or predict the budgeted costs before hand.

C) The advantage of actual over actual is that we get the exact amount of expense that is incurred but the biggest disadvantage is we have no clue of the overheads till the time period is not over.

We would encourage the second method because it comes nearest to the total actual expenses.