# Cost Allocation Method by ClassOf1

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Sub: Accounting                                                                         Topic: Cost Accounting

Cost Allocation Method

Question:
The AC Corporation operates one central plant that has two divisions, the Flashlight Division and the
Night Light Division. The following data apply to the coming budget year:

Budgeted costs of the operating the plant for 10,000 to 20,000 hours:
Fixed operating costs per year \$240,000
Variable operating costs                 \$10 per hour
Practical capacity                       20,000 hours per year

Budgeted long-run usage per year:
Lamp Division                   800 hours × 12 months = 9,600 hours per year
Flashlight Division             450 hours × 12 months = 5,400 hours per year

Assume that practical capacity is used to calculate the allocation rates. Further assume that actual
usage of the Lamp Division was 700 hours and the Flashlight Division was 400 hours for the month of
June.

Required:

a. If a single-rate cost-allocation method is used, what amount of operating costs will be budgeted
for the Lamp Division each month? For the Flashlight Division each month?

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Sub: Accounting                                                                         Topic: Cost Accounting
b. For the month of June, if a single-rate cost-allocation method is used, what amount of cost will be
allocated to the Lamp Division? To the Flashlight Division? Assume actual usage is used to
allocate operating costs.

c. If a dual-rate cost-allocation method is used, what amount of operating costs will be budgeted for
the Lamp Division each month? For the Flashlight Division each month?

d. For the month of June, if a dual-rate cost-allocation method is used, what amount of cost will be
allocated to the Lamp Division? To the Flashlight Division? Assume budgeted usage is used to
allocate fixed operating costs and actual usage is used to allocate variable operating costs.

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Sub: Accounting                                                                         Topic: Cost Accounting

Solution:
Excel workings:

a)   Fixed operating costs Per the year                                                       240000
Practical capacity                                                                       20000
=240000/20000
Fixed operating costs Per hour                                                           =12
Variable operating costs per hour                                                        10
=           Fixed
operating costs
Per     hour     +
Variable
operating costs
Single rate cost allocation Per hour                                                     per hour=22
Budgeted operating costs for Lamp Division
Budgeted operating Hours for Lamp Division per each month                                800
Single rate cost allocation Per hour                                                     22
Total operating costs Budgeted for Lamp                      Division for Each =800*22=17,60
Month                                                                                    0
Budgeted operating Costs For Flash Light division
Budgeted operating hours for Flash Light Division for each month                         450
Single rate cost allocation Per hour                                                     22
Total operating costs Budgeted for Flash Light Division for Each
Month                                                                                    =450*22=9,900

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Sub: Accounting                                                                         Topic: Cost Accounting

B)
Lamp Division actual hours used in the month of June                                     700
Single rate cost allocation Per hour                                                     22
On the basis single rate cost allocation base the amount cost =700*22=15,40
allocated to Lamp Division                                                               0
Flash Light Division Actual hours used in the month of June                              400
Single rate cost allocation Per hour                                                     22
On the basis single rate cost allocation base the amount cost
allocated to Flash Light Division                                                        =400*22=8,800

C)   Practical capacity as central Division                                                   20000                Hours
Same Practical Capacity has been divided on the basis of Budgeted usage
Lamp division (20000*9600/15000 = 12800)                                                 12800                hours
Flash Light Division ( 20000*5400/15000=7200)                                            7200                 hours
Fixed operating costs has been divided between on the basis Practical hours of each Division
=240000*1280
0/20000=15360
Fixed operating costs For Lamp Division (240000*12800/20000)                             0
Practical capacity of Lamb Division                                                      12800                hours
=153600/12800
Fixed operating cost of Lamp Division Per hour                                           =12
Variable operating costs as central division (20000*10)\$200000
Share of Lamp             division on the variable operating costs
(200000*12800/20000)                                                                     =128000
Variable operating of Lamb Division per hour (1280000/12800)                             =128000/12800

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Sub: Accounting                                                                        Topic: Cost Accounting

=10
Fixed operating costs has been divided between on the basis Practical hours of each Division
Fixed       operating         costs       For      Flash        light      Division
(240000*7200/20000)                                                                      =86400
Practical capacity of Flash Light Division                                               7200
=86400/7200=1
Fixed operating cost of Flash Light Division Per hour                                    2
Share of Variable operating costs of Flash Light Division
(200000*7200/20000)                                                                      =72000
=72000/7200=1
Variable operating costs of Flash Light Division (72000/72000)                           0
Budgeted operating costs for Lamp Division
Budgeted operating Hours for Lamp Division per each month                                800
Fixed operating cost per hour for Lamp division                                          =12
Fixed     operating costs Budgeted for Lamp                   Division for Each
Month                                                                                    =800*12=9600
Variable operating of Lamb Division per hour (1280000/12800)                             10
variable operating costs Budgeted for lamp division for each
Month                                                                                    =800*10=8000
Total operating costs Budgeted for Lamp                       Division for Each =9600+8000=1
Month                                                                                    7,600
Budgeted operating costs for Flash Light Division
Budgeted operating Hours for Flash Light Division per each month 450
Fixed operating cost per hour for Flash Light division                                   =12

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Sub: Accounting                                                                         Topic: Cost Accounting

Fixed operating costs Budgeted for Flash Light Division for Each
Month                                                                                    =450*12=5400
Variable operating of Lamb Division per hour (72000/7200)                                10
variable operating costs Budgeted for lamp division for each
Month                                                                                    =450*10=4500
Total operating costs Budgeted for Flash Light                 Division for Each =5400+4500=9
Month                                                                                    900

D)   Fixed operating costs per year                                                           240000
Based on Budget usage Fixed operating costs allocated to Lamp
Division (240000/15000*9600)                                                             =153600
Budgeted usage per year (in hours)                                                       9600
=153600/9600=
Fixed operating cost per hour                                                            16
Budgeted usage for the month of June                                                     800
Fixed operating costs allocated for the month of June for Lamp =800*16=1280
Division                                                                                 0
Variable operating costs per year                                                        200000
Share of Lamp             division on the variable operating costs
(200000*8400/13200)                                                                      =127,273
Actual usage per year                                                                    =700*12=8400
=127,273/8400
Variable operating Costs per hour                                                        =15.15
Actual usage For the month of June                                                       700
Variable costs allocated to the month of June on the basis of =700*15.15=10

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Sub: Accounting                                                                        Topic: Cost Accounting

Actual usage                                                                             ,606
=12800+10606
Total costs allocated Lamp division in the month of June                                 =23406
Fixed operating costs per year                                                           240000
Based on Budget usage Fixed operating costs allocated to Flash
Light Division (240000/15000*5400)                                                       =86400
Budgeted usage per year (in hours)                                                       5400
=
Fixed operating cost per hour                                                            86400/5400=16
Budgeted usage for the month of June                                                     800
Fixed operating costs allocated for the month of June for Flash =800*16=1280
Light Division                                                                           0
Variable operating costs per year                                                        200000
Share of Flash Light division on the variable operating costs
(200000*4800/13200)                                                                      =72727
Actual usage per year (in hours)

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