Question

Vans is a manufacturer of women’s and men’s swimsuits. The company uses a dual-rate system to allocate support costs. Last year’s support departments’ fixed and variable costs are as follows:

					Human
		Accounting			Resources			Janitorial			Total
Variable costs		$	18,420		$	22,104		$	60,360		$	100,884
Fixed costs			55,260			100,696			60,360			216,316
Total costs		$	73,680		$	122,800		$	120,720		$	317,200

Allocation base amounts for all the departments are as follows:

					Human
		Accounting			Resources			Janitorial			Women's			Men's			Total
Employees			2			2			4			10			6			24
Time spent for accounting			15%			10%			20%			30%			25%			100%
Time spent cleaning			5%			10%			15%			30%			40%			100%
Square metres			80			100			120			500			500			1,300
Direct costs		$	73,680		$	122,800		$	120,720		$	800,000		$	500,000		$	1,617,200

A. Suppose support costs were not broken down into fixed and variable cost pools. What allocation base would you use to allocate the costs for each support department? Explain.

B. Describe several possible reasons why the managers of Vines Company allocate support costs to operating departments.

C. Discuss whether a dual-rate support cost allocation system is likely to be better for Vines Company than a single-rate system.

Answer 1

A) following allocation based will be best

1. Accounting Dept = time spent for accounting

2. Human resources = no of employees

3. Janitorial = time spent cleaning

B) since service department in itself don't generate any revenue their cost need to be included in products so that actual profit can be calculated.

So it helps in.calculating cost per unit . To represent true picture of business.

Allocation is necessary because there can be department who has. Not used services or used very less.. so allocating total cost to all products together will be a hurdle to find out which product is profitable.

C) Using two rates are better because of variable cost changes based on different factors.so there should be cost allocation based on the same factor.

For example if one products don't use human resources service.. we can not allocate cost to that product.

Also since fixed costs don't Chang with usage hence can be allocated equally.

Feel free to ask any queries...

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