Question

Vines Company is a manufacturer of women’s and men’s swimsuits. The company uses a dual-rate
system to allocate support costs. Last year’s support departments’ fixed and variable costs are as
follows:
Accounting
Human
Resources Janitorial Total
Variable costs $18,420 $22,104 $60,360 $100,884
Fixed costs $55,260 $100,696 $60,360 $216,316
Total cost $73,680 $122,800 $120,720 $317,200
Allocation base amounts for all the departments are as follows:
Accounting
Human
Resources Janitorial Women’s Men’s Total
Employees 2 2 4 10 6 24
Time spent for accounting 15% 10% 20% 30% 25% 100%
Time spent cleaning 5% 10% 15% 30% 40% 100%
Square metres 80 100 120 500 500 1,300
Direct costs $73,680 $122,800 $120,720 $800,000 $500,000 $1,617,200
Requirements:
1. Use the following allocation bases for fixed support costs: direct costs for accounting, number of
employees for human resources, and square metres for janitorial.
(a) Allocate fixed support costs using the direct method.
(b) Allocate fixed support costs using the step-down (sequential) method. (Rank each support
department according to the dollar amount of service provided to other support departments
from highest service dollars to smallest service dollars in the support department.)
(c) Allocate fixed support costs using the reciprocal method.
2. Use the following allocation bases for variable support costs: time spent for accounting, number of
employees for human resources, and time spent for janitorial.
(a) Allocate variable support costs using the direct method.
(b) Allocate variable support costs using the step-down (sequential) method. (Rank each support
department according to the dollar amount of service provided to other support departments
from highest service dollars to smallest service dollars in the support department.)
(c) Allocate variable support costs using the reciprocal method.
3. Suppose support costs were not broken down into fixed and variable cost pools. What allocation
base would you use to allocate the costs for each support department? Support and explain your
response.
4. Describe at least three distinct unique possible reasons, with supporting explanation, why the
managers of Vines Company allocate support costs to production/operating departments.
5. Discuss whether a dual-rate support cost allocation system is likely to be better for Vines Company
than a single-rate system. Support and explain your response.