Chapter 15, Problem 15.27P

Single-rate, dual-rate, and practical capacity allocation. Preston Department Store has a new promotional program that offers a free gift-wrapping service for its customers. Preston’s customer-service department has practical capacity to wrap 5,000 gifts at a budgeted fixed cost of $4,950 each month. The budgeted variable cost to gift-wrap an item is $0.35. During the most recent month, the department budgeted to wrap 4,500 gifts. Although the service is free to customers, a gift-wrapping service cost allocation is made to the department where the item was purchased. The customer-service department reported the following for the most recent month:

1. 1. Using the single-rate method, allocate gift-wrapping costs to different departments in these three ways:

   Required

   1. a. Calculate the budgeted rate based on the budgeted number of gifts to be wrapped and allocate costs based on the budgeted use (of gift-wrapping services).
   2. b. Calculate the budgeted rate based on the budgeted number of gifts to be wrapped and allocate costs based on actual usage.
   3. c. Calculate the budgeted rate based on the practical gift-wrapping capacity available and allocate costs based on actual usage.
2. 2. Using the dual-rate method, compute the amount allocated to each department when (a) the fixed-cost rate is calculated using budgeted fixed costs and the practical gift-wrapping capacity, (b) fixed costs are allocated based on budgeted fixed costs and budgeted usage of gift-wrapping services, and (c) variable costs are allocated using the budgeted variable-cost rate and actual usage.
3. 3. Comment on your results in requirements 1 and 2. Discuss the advantages of the dual-rate method.