Answer:
Preston Department Store
1) Using the single-rate method:
a. Calculation of the budgeted rate based on the budgeted number of gifts = Total overhead/budgeted number of gifts
= $6,525/4,500
= $1.45
Allocation of costs based on the budgeted use of gift-wrapping services:
Department Budgeted Items Budgeted Allocation
Wrapped Rate
Giftware 1,000 $1.45 $1,450.00
Women's Apparel 850 $1.45 1,232.50
Fragrances 1,000 $1.45 $1,450.00
Men's Apparel 750 $1.45 $1,087.50
Domestic 900 $1.45 $ 1,305.00
Total 4,500 $1.45 $6,525.00
b. Allocation of costs based on the actual use of gift-wrapping services:
Department Actual Items Budgeted Allocation
Wrapped Rate
Giftware 1,200 $1.45 $1,740.00
Women's Apparel 650 $1.45 $942.50
Fragrances 900 $1.45 $1,305.00
Men's Apparel 450 $1.45 $652.50
Domestic 800 $1.45 $ 1,160.00
Total 4,000 $1.45 $5,800.00
c. Budgeted rate based on the practical gift-wrapping capacity:
= Total budgeted costs/practical gift-wrapping capacity
= $6,700/5,000
= $1.34
Allocation of costs based on the actual use of gift-wrapping services:
Department Actual Items Budgeted Allocation
Wrapped Rate
Giftware 1,200 $1.34 $1,608.00
Women's Apparel 650 $1.34 $871.00
Fragrances 900 $1.34 $1,206.00
Men's Apparel 450 $1.34 $603.00
Domestic 800 $1.34 $ 1,072.00
Total 4,000 $1.34 $5,360.00
2. Using the dual-rate method:
Fixed cost rate = $4,950/5,000 = $0.99
Variable cost rate = $0.35
a) Allocation of costs based on the actual use of gift-wrapping services:
Department Budgeted Items Actual Items Allocation
Wrapped Wrapped Fixed Variable Total
Giftware 1,000 1,200 $990.00 $420 $1,410
Women's Apparel 850 650 841.50 227.5 $1,069
Fragrances 1,000 900 990.00 315 $1,305
Men's Apparel 750 450 742.50 157.5 $900
Domestic 900 800 891.00 280 $1,171
Total 4,000 $5,855
b) Allocation of fixed cost based on budgeted usage of gift-wrapping services:
Fixed cost rate based on budgeted usage = $4,950/4,500 = $1.10
Department Budgeted Items Allocation of
Wrapped Fixed costs
Giftware 1,000 $1,100
Women's Apparel 850 $ 935
Fragrances 1,000 $ 1,100
Men's Apparel 750 $ 825
Domestic 900 $ 990
Total 4,500 $4,950
c) Allocation of variable costs using the budgeted variable-cost rate and actual usage
Variable cost rate = $0.35
Department Actual Items Allocation of
Wrapped Variable costs
Giftware 1,200 $420
Women's Apparel 650 $227.50
Fragrances 900 $ 315
Men's Apparel 450 $157.50
Domestic 800 $280
Total 4,000 $1,400
3. It looks as if the dual-rate method is far better than the single-rate method. But it consumes more time during the allocation process. It is also a bit difficult and confusing.
The dual-rate cost allocation method categorizes costs into fixed costs and variable costs. The dual-rate method gives different cost allocation rates and is a more exact cost allocation method.
Explanation:
Practical capacity = 5,000
Budgeted fixed cost = $4,950
Budgeted variable cost = $0.35
Budgeted units = 4,500
Budgeted variable cost = $1,575 ($0.35 * 4,500)
Total overhead = $6,525 ($4,950 + 1,575)
Predetermined overhead rate = $1.45 ($6,525/4,500)
Department Budgeted Items Actual Items
Wrapped Wrapped
Giftware 1,000 1,200
Women's Apparel 850 650
Fragrances 1,000 900
Men's Apparel 750 450
Domestic 900 800
Total 4,500 4,000