Question

Illumination 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 operating the plant for 2000 to 3000 hours:
Fixed operating costs per year $500,000
Variable operating costs $900 per hour
Budgeted long-run usage per year:
Flashlight Division 2000 hours
Night Light Division 1000 hours
Practical capacity 4000 hours

Assume that practical capacity is used to calculate the allocation rates.

Actual usage for the year by the Flashlight Division was 1500 hours and by the Night Light Division was 800 hours. If a single-rate cost-allocation method is used, what amount of cost will be allocated to the Flashlight Division? Assume actual usage is used to allocate operating costs.

		$1,850,000
		$1,200,000
		$2,050,000
		$1,537,500

Answer 1

Solution :-

The answer is last option $1,537,500 .

Explanation :-

Particulars	Amount
Budgeted total fixed overhead costs	$500,000
Practical capacity hours	4000 hours
Single allocation rate per hour	= $500,000 / 4000 hours = $125
Actual usage for the year by the Flashlight Division (Hours)	1500 hours
Fixed overhead cost allocated to the Flashlight division	= 1500 hours * $125 = $187,500
Variable overhead cost allocated to the Flashlight Division	= 1500 hours *  $900 per hour = $1,350,000
Total cost allocated to the Flashlight Division	= $1,350,000 +  $187,500 = $1,537,500