Many companies use the dual-rate method of cost allocation.Required: A. How does the dual-rate method work?B. Is there any advantage of the dual-rate method over a method that uses a combined, lump-sum single rate? Briefly explain.
What will be an ideal response?
A. The dual-rate method involves creating two overhead rates, one for variable costs and another for fixed costs. The variable costs are normally allocated on the basis of short-run usage of the service department's output; fixed costs are allocated on the basis of long-run usage.
B. Yes. When a single rate is used, the cost allocated to a user department may be influenced by the amount of service consumed by another department. For example, a user department's service consumption could remain flat; yet the amount of cost allocated to that department could increase or decrease over previous amounts based solely on actions of other users. Dual rates eliminate this problem.
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Tustin Corporation has provided the following data for its two most recent years of operation: Selling price per unit$68 Manufacturing costs: Variable manufacturing cost per unit produced: Direct materials$10Direct labor$6Variable manufacturing overhead$4Fixed manufacturing overhead per year$220,000Selling and administrative expenses: Variable selling and administrative expense per unit sold$6Fixed selling and administrative expense per year$61,000 Year 1Year 2Units in beginning inventory01,000Units produced during the year11,00010,000Units sold during the year10,0007,000Units in ending inventory1,0004,000The unit product cost under variable costing in Year 1 is closest to:
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