Question

Landmark Systems Inc. designs and manufactures global positioning navigation systems for all-terrain vehicles and watercraft. 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.

Answer 1