Question

Mahoney & Levine is an accounting firm serving its customers in the areas of Audit, Tax, and Management Advisory Services. In 2019, a new photocopying department was established. Before deciding on the photocopying service's size and capacity, each unit was asked to predict their annual and monthly peak usage. Estimated annual usage (in pages) for each department was as follows

Audit Department	94,500
Tax Department	67,500
MAS Department	108,000

The Audit and MAS departments reported that their usage was distributed evenly throughout the year, with an estimated monthly usage of 7,875 and 9,000 pages, respectively. In contrast to the Audit and MAS departments, the Tax department indicated that one-third of its annual usage will occur in the month of April with 22,500 pages.

Based on this information, Mahoney & Levine decided to lease a high capacity photocopy machine and hire a person for the photocopy services. The costs associated with the Photocopying Department were as follows:

                       Fixed Costs (Machine Rental, Salaries): $26,190 per year

                       Variable Costs (paper and toner): $0.023 per page copied

The following budgeted and actual information is obtained:

	Estimated (budgeted) Yearly Pages	Actual Usage in Year
Audit Department	94,500	92,000
Tax Department	67,500	65,000
MAS Department	108,000	115,000
Total Pages	270,000	272,000

Required:

Discuss various alternatives for fair allocation of the photocopying department costs between Audit, Tax, and MAS departments.

Show your results in each alternative approach.

Answer 1

ALLOCATION OF COST TO DIFFERENT DEPARTMENTS USING MULTIPLE CHARGING RATE METHOD

Note: - Variable rate is based on number of pages and fixed rate is based on peak usage.
STEP 1:- Calculation of allocation ratio
Allocation ratio = Producing department capacity/Total capacity    

DEPARTMENT	Peak number of copies	Percentage
Audit	7875	7875/39375*100 = 20
Tax	22500	22500/39375*100 = 57
MAS	9000	9000/39375*100 = 23
Total	39375	100

STEP 2 :- Allocation of Fixed Cost

DEPARTMENT	Peak number of copies	Percentage	Fixed Cost	Allocated fixed cost
Audit	7875	7875/39375*100 = 20	26190	26190*20%=5238
Tax	22500	22500/39375*100 = 57	26190	26190*57%=14928
MAS	9000	9000/39375*100 = 23	26190	26190*23%=6024
Total	39375	100		26190

STEP 3:- Calculation of Total Cost

DEPARTMENT	FIXED COST	VARIABLE COST @$0.023 per page	TOTAL COST
Audit	5238	92000*0.023=2116	$7354
Tax	14928	65000*0.023=1495	$16423
MAS	6024	1150008*0.023=2645	$8669
Total	$26190	$6256	$32446