Name : Edward Tarigan

Student Number : 1606910935

Summary (Page 619 - 623)

Advantages and Disadvantages of Single-Rate Method

Advantages :

1. Less costly because do not need expensive analysis to classify the individual cost items.

2. More real because offering user departments some operational control based on the actual
usage of support services.

Disadvantages :

1. Might be inefficient for the organization because leads the operating department managers
to make a sub-optimal decision with allocating fixed cost as a variable cost to the
operating departments.

Advantages and Disadvantages of Double-Rate Method

Advantages :

1. Guides department managers in making an optimal decisions because department managers

differentiating between fixed and variable costs.

2. Helps managers making a short-run nor long-run planning.

Disadvantages :

1. Challenge the managers, because this method requires the managers to distinguish the fixed
and variable costs.

2. Does not indicate to operating managers the cost of fixed support department, because fixed
costs of operating department is based on budgeted, does not based on the actual usage in
the firm.

3. May tempting the managers to have a under-estimate feel , because allocating fixed costs
based on budgeted long-run usage.
Budgeted Versus Actual Costs and the Choice of Allocation Base

 Budgeted Versus Actual Rates

When allocations are made using budgeted rates, manager of departments know with
certainty the rates to be used in that budget period. This rates also improve efficiency
because user departments do not pay for any cost of the supplier department that cause
actual rates exceeding budgeted rates. If actual rates are used for cost allocation, user
departments are not informed of their charges until the end of budget period.

 Bugdeted Versus Actual Usage

Make variable costs as the actual usage is appropriate, because the variable costs are
directly and linked to usage of firm’s cost. Meanwhile, if we charge the variable costs
as a budgeted usage would provide the user departments with no incentive to control
the consumption of support services.

 Fixed Cost Allocation Based on Budgeted Rates and Budgeted Usage

When budgeted usage as a based of cost allocation, user departments receive a preset
lump-sum fixed-cost charge. If budgeted rates is the allocation base, the expected
budget and the actual budget will be interconnected because the rates are set using
practical capacity, and if the actual cost is more less than the budgeted costs, that will
be unallocated cost.

 Fixed-cost Allocation Based on Budgeted Rates and Actual Usage

Variations in actual usage in one department do not affect the cost allocated to the other
departments, but the budgeted rates are affecting the actual usage of each departments.
This allocation procedure is exactly same as that under the single-rate method. Use a
practical capacity for allocating fixed costs avoid the costs of unused capacity.

 Allocating Budgeted Fixed Costs Based on Actual Usage

When budgeted fixed costs are allocated based on actual usage, user departments will
not know their fixed-cost allocations before the budgeted period is end. The total actual
usage will change the fixed costs allocated to a department.