Question

Firm X has a new promotional program that offers a free gift-wrapping service for its customers. Its customer-service department has practical capacity to wrap 5,000 gifts at a budgeted fixed cost of $4,950 each month. The budgeted variable cost to gift-wrap an item is $0.35. During September 2020, the department budgeted to wrap 4,500 gifts. Although the service is free to customers, a gift-wrapping service cost allocation is made to the department where the item was purchased. The customer-service department reported the following for the month:

Department	Budgeted Items Wrapped	Actual Items Wrapped
A	1,000	1,200
B	850	650
C	1,000	900
D	750	450
E	900	800
Total	4,500	4,000

(27-1) Using the single-rate method, allocate gift-wrapping costs to different departments in these three ways (7 points):

  (27-1-a). Calculate the budgeted rate based on the budgeted number of gifts to be wrapped and allocate costs based on the budgeted use (of gift-wrapping services).

    (27-1-b). Calculate the budgeted rate based on the budgeted number of gifts to be wrapped and allocate costs based on actual usage.

    (27-1-c). Calculate the budgeted rate based on the practical gift-wrapping capacity available and allocate costs based on actual usage

(27-2) Using the dual-rate method, compute the amount allocated to each department and the budgeted rate is based on capacity. (3 points)

(27-3) Comment on your results in (26.1) and (26.2). Discuss the differences, advantages, and disadvantages of the single-rate method and dual-rate method. (6 points)

Answer 1

27-1-a.

Budgeted rate based on the budgeted number of gifts to be wrapped =

Single rate for both Fixed costs & Variable cost combined

ie.(4950+(4500*0.35))/4500

1.45

per item

27-1-a.Allocation costs based on the budgeted use (of gift-wrapping services)
Department	Budgeted Items Wrapped	No.of items*$1.45/item
A	1,000	1450
B	850	1232.5
C	1,000	1450
D	750	1087.5
E	900	1305
Total	4,500	6525

(27-1-b) Allocation of above budgeted rate costs based on actual usage.
Department	Actual Items Wrapped	No.of items*$1.45/item
A	1,200	1740
B	650	942.5
C	900	1305
D	450	652.5
E	800	1160
Total	4,000	5800

(27-1-c)Budgeted rate based on the practical gift-wrapping capacity available

ie.(4950/5000)+0.35=

0.99+0.35= $ 1.34

per item

& allocation of costs based on actual usage
Department	Actual Items Wrapped	No.of items*$1.34/item
A	1,200	1608
B	650	871
C	900	1206
D	450	603
E	800	1072
Total	4,000	5360

(27-2) Using the dual-rate method,amount allocated to each department and the budgeted rate is based on capacity

Dept.	Budgeted Items Wrapped	FOH at 4950/5000=0.99/item*Budgeted items	Actual Items Wrapped	VOH at 0.35/item*actual item	Total OH allocated--Cols.(3+5)
A	1,000	990	1,200	420	1410
B	850	841.5	650	227.5	1069
C	1,000	990	900	315	1305
D	750	742.5	450	157.5	900
E	900	891	800	280	1171
Total	4,500	4455	4,000	1400	5855

Summary
Single-rate based on	Total OH
Budgeted usage	6525
Actual usage	5800
Practical capacity	5360
Dual rate(based on budgeted usage*FOH rate based on practical capacity) & (actual usage budgeted*VOH rate)	5855

Fixed costs towards unused capacity of 5000-4000=1000 items , ie. 1000* $ 0.99=$ 990 is borne by the actual items wrapped.

27-3 Single-rate method

Advantage

Easy to implement--as there is no need to segregate costs into fixed & variable

So,costs to implement are also less.

Disadvantage

Decisions based on this , may be favorable to one dept. & adverse to another.

Dual rate method

Advantage

Segregates costs into fixed & variable components.

so, it is easy to identify idle /unused capacities & utilise them fully to lower the incidence of costs on units.

Disadvantage

Is the difficulty in segregating costs & implementing systems.