Question

Problem 11B-4 Service Department Charges (LO11-6] Sharp Motor Company has two operating divisions-an Auto Division and a Truck Division. The company has a cafeteria that serves the employees of both divisions. The costs of operating the cafeteria are budgeted at $79,000 per month plus $0.70 per meal served. The company pays all the cost of the meals. The fixed costs of the cafeteria are determined by peak period requirements. The Auto Division is responsible for 71% of the peak period requirements, and the Truck Division is responsible for the other 29% For June, the Auto Division estimated it would need 86,000 meals served, and the Truck Division estimated it would need 56,000 meals served. However, due to unexpected layoffs of employees during the month, only 56,000 meals were served to the Auto Division. Another 56,000 meals were served to the Truck Division as planned. Cost records in the cafeteria show that actual fixed costs for June totaled $83,000 and actual meal costs totaled $97,400. Required: 1. How much cafeteria cost should be charged to each division for June? 2. Assume the company follows the practice of allocating all cafeteria costs incurred each month to the divisions in proportion to the number of meals served to each division during the month. On this basis, how much cost would be allocated to each division for June? (Round your intermediate calculations to 2 decimal places.) Auto Division Truck Division 1. Total cost charged 2. Total cost allocated

Answer 1

Total cost charged- (Fixed Cost+Meal cost)

Auto Division= (71%*$83000) + (($97400/112000)*56000)

=$(58930+48700) = $107630

Truck Division= (29%*$83000) + (($97400/112000)*56000))

=$(24070+48700)=$72770

Note here that meals actually served = 56000+56000 =112000 meals and hence been used in the above calculations to compute the meal cost for the respective division.

Total cost allocated

For allocation, we need to calculate the pre-determined overhead rate i.e.

Pre-determined overhead rate = Estimated overheads(Total estimates cost)/Estimated base (meals)

= $178400/142000

=$1.256 per meal

Where, the estimated overheads (cost)= Fixed cost+Estimated meal cost

=$79000 + $0.70*(86000+56000)

=$178400

Allocation

Total cost allocated = Pre-determined overhead rate*Actual base (meals)

Auto Division =($178400/$142000)*56000

=$70,355

Truck Division=($178400/$142000)*56000

$70,355

Note that the total cost have been allocated by rounding to the nearest digit.