Question

A company incurred $80,000 of common fixed costs and $120,000 of common variable costs. These costs are to be allocated to Departments A and B. Data on capacity provided and capacity used are as follows:

	Capacity Provided	Capacity Used
Department	in Hours	in Hours
A	400	320
B	240	320

Assume that both fixed and variable costs are allocated on the basis of capacity used. The fixed and variable costs allocated to Department A are

Fixed

Variable

a.

$50,000 $75,000

b.

$50,000 $60,000

c.

$40,000 $75,000

d.

$40,000 $60,000

Answer 1

Common fixed cost = $80,000

Common variable cost = $120,000

Fixed and variable cost are to be allocated on the basis of capacity used.

Capacity used by department A = 320 hours

Capacity used by department B = 320 hours

Total capacity used hours = 320 + 320

= 640 hours

Hence, fixed cost to be allocated to department A = Total fixed cost x Capacity used by department A/Total capacity used hours

= 80,000 x 320/640

= $40,000

Variable cost to be allocated to department A = Total variable cost x Capacity used by department A/Total capacity used hours

= 120,000 x 320/640

= $60,000

Fixed	Variable
$40,000	$60,000

Correct option is (D)