Session 12 Solutions

Session 12 Solutions - Example The Computer center has...

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Example : The Computer center has fixed costs of $90,000 and variable costs of $2/hour of use, and budgeted monthly use of 300 hours. Suppose we want to allocate the costs of the computer center among the departments that use its services. How might we do that? The answer to that question depends on the answer to several other questions.
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a) Should Fixed and Variable Costs be Allocated in the Same Way? Single-rate Method : Using a single rate fixed and variable costs are accumulated into a single cost pool and the average (fixed + variable) unit cost is allocated using a single driver (corresponding to the actual quantity of services used by the operating departments). Dual-rate Method: Using a dual rate method fixed and variable costs are accumulated in different cost pools and variable costs are allocated using one driver, but fixed costs are allocated separately, on some other basis. The Dual-rate method is preferred: It avoids the perverse consequences that often result from using one driver to allocate both variable and fixed costs. However, it is more costly to implement.
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b) Should the Allocation be Based on Budgeted Costs or Actual Costs? For variable costs , use of a budgeted rate is preferred because it forces the department whose costs are being allocated to be responsible for cost over- runs. (i.e. The over- (under-) applied costs remain in the service department’s cost accounts.) But, what about fixed costs ? Example
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This note was uploaded on 10/06/2010 for the course FNCE 100 taught by Professor Jaffe during the Spring '10 term at UNC Asheville.

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Session 12 Solutions - Example The Computer center has...

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