Question

Question no 2

A housekeeping support department budgets its costs at SR 40,000 per month plus SR 12 / hour. For January the following were the estimated and actual hours provided by the housekeeping support department to 3 operating department.

	Estimated hours spent cleaning	Actual hours spent cleaning
Department A	1600	1500
Department B	1400	1600
Department C	2000	1800
Total	5000	4900

Required:

A-        What is the support department's allocation rate if estimated activity is the allocation base?

B         What is the support department's allocation rate if actual activity is the allocation base?

C         List one advantages and one disadvantage for each types of allocation rate. (3 points)

Answer 1

Solution:

Part A – Allocation Rate of Supporting Department if allocation base is estimated activity

	Allocation Rate
Estimated Fixed Monthly Budgeted Costs of Support Department	SR 40,000
Total Estimated Activity (Estimated Hours Spent on Cleaning)	5,000
Fixed Budgeted Overhead Rate (SR 40,000 / 5,000)	SR 8	Per Hour
Plus: Variable Estimated Allocation Rate	SR 5	Per Hour
Allocation Rate (Fixed + Variable)	SR 13	Per Hour

Part B - Part A – Allocation Rate of Supporting Department if allocation base is actual activity

	Allocation Rate
Estimated Fixed Monthly Budgeted Costs of Support Department	SR 40,000
Total Actual Activity (Actual Hours Spent on Cleaning)	4,900
Fixed Budgeted Overhead Rate (SR 40,000 / 4,900)	SR 8.16	Per Hour
Plus: Variable Estimated Allocation Rate	SR 5	Per Hour
Allocation Rate (Fixed + Variable)	SR 13.16	Per Hour

Part C - List one advantages and one disadvantage for each types of allocation rate

Advantage for Allocation base is estimated activity --- Allocation Rate based on estimated activity can be used to plan for the cost of future projects. This rate smooth out seasonal variations in overhead costs.

Advantage for Allocation base is actual activity --- It allocates the overheads more accurately to products and processes that use the activity.

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