The Chicago power plant that services all manufacturing departments of MidWestEngineering has a budget for the coming year. This budget has been expressed in thefollowing monthly terms:Manufacturing Needed at Practical Capacity Average Expected MonthlyDepartment Production Level (Kilowatt- Usage (Kilowatt-Hours)Rockford 10,000 8,000Peoria 20,000 9,000Hammond 12,000 7,000Kankakee 8,000 6,000Total 50,000 30,000The expected monthly costs for operating the power plant during the budget year are $15,000:$6,000 variable and $9,000 fixed.Required:1. Assume that a single cost pool is used for the power plant costs.What budgeted amounts will be allocated to each manufacturing department if:(a) the rate is calculated based on practical capacity and costs are allocated based onpractical capacity, and(b) the rate is calculated based on expected monthly usage and costs are allocated basedon expected monthly usage?2. Assume the dual-rate method is used with separate cost pools for the variable andfixed costs. Variable costs are allocated on the basis of expected monthly usage.Fixed costs are allocated on the basis of practical capacity.(a) What budgeted amounts will be allocated to each manufacturing department?(b) Why might you prefer the dual-rate method?
The Chicago power plant that services all manufacturing departments of MidWest
Engineering has a budget for the coming year. This budget has been expressed in the
following monthly terms:
Manufacturing Needed at Practical Capacity Average Expected Monthly
Department Production Level (Kilowatt- Usage (Kilowatt-Hours)
Rockford 10,000 8,000
Peoria 20,000 9,000
Hammond 12,000 7,000
Kankakee 8,000 6,000
Total 50,000 30,000
The expected monthly costs for operating the power plant during the budget year are $15,000:
$6,000 variable and $9,000 fixed.
Required:
1. Assume that a single cost pool is used for the power plant costs.
What budgeted amounts will be allocated to each manufacturing department if:
(a) the rate is calculated based on practical capacity and costs are allocated based on
practical capacity, and
(b) the rate is calculated based on expected monthly usage and costs are allocated based
on expected monthly usage?
2. Assume the dual-rate method is used with separate cost pools for the variable and
fixed costs. Variable costs are allocated on the basis of expected monthly usage.
Fixed costs are allocated on the basis of practical capacity.
(a) What budgeted amounts will be allocated to each manufacturing department?
(b) Why might you prefer the dual-rate method?
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