Charlie Company has provided the following data concerning power consumption in the company's two operating departments: The company has a Power Services department which provides electrical power for the operating departments. Fixed costs in Power Services are budgeted at $300,000 for the year and are incurred in order to support peak-period power requirements. How much of this cost should be charged to Department 1?
A)$120,000
B)$150,000
C)$180,000
D)$0

Question

Charlie Company has provided the following data concerning power consumption in the company's two operating departments:  The company has a Power Services department which provides electrical power for the operating departments. Fixed costs in Power Services are budgeted at $300,000 for the year and are incurred in order to support peak-period power requirements. How much of this cost should be charged to Department 1?
A)$120,000 
B)$150,000 
C)$180,000 
D)$0

Quizplus · Accepted Answer

The fixed costs of Power Services department are incurred to support peak-period power requirements. As such, the cost should be allocated to the departments based on their usage during peak periods. Since Department 1 has a higher usage during peak periods (900 kW vs Department 2's 600 kW), it should be allocated a higher portion of the fixed costs, based on the ratio of their peak period usage.

Allocation Rate = Department 1 Peak Period Usage / Total Peak Period Usage = 900 / (900 + 600) = 0.6

Fixed Costs Allocated to Department 1 = Allocation Rate * Fixed Costs = 0.6 * $300,000 = $180,000

Charlie Company Has Provided the Following Data Concerning Power Consumption