FIGURE 7-5
Stronghold, Inc., operates a brochure business at two different locations. Stronghold, Inc., has one support department that is responsible for cleaning, service, and maintenance of its printing equipment. The costs of the support department are allocated to each brochure center on the basis of total brochures made.
During the first month, the costs of the support department were expected to be $400,000. Of this amount, $120,000 is considered a fixed cost. During the month, the support department incurred actual variable costs of $256,000 and actual fixed costs of $144,000.
Normal and actual activity (brochures made) are as follows:

-Refer to Figure 7-5. For purposes of performance evaluation, fixed costs allocated to Brochure Center 2 are

Question

FIGURE 7-5
Stronghold, Inc., operates a brochure business at two different locations. Stronghold, Inc., has one support department that is responsible for cleaning, service, and maintenance of its printing equipment. The costs of the support department are allocated to each brochure center on the basis of total brochures made.
During the first month, the costs of the support department were expected to be $400,000. Of this amount, $120,000 is considered a fixed cost. During the month, the support department incurred actual variable costs of $256,000 and actual fixed costs of $144,000.
Normal and actual activity (brochures made) are as follows:
 
-Refer to Figure 7-5. For purposes of performance evaluation, fixed costs allocated to Brochure Center 2 are

Quizplus · Accepted Answer

To allocate the fixed costs to each brochure center, we need to use the predetermined overhead rate.

Predetermined overhead rate = Total cost of support department / Total brochures made

Total cost of support department = $400,000 (given) 
Total brochures made = 80,000 + 120,000 = 200,000 (given)

Predetermined overhead rate = $400,000 / 200,000 = $2 per brochure

Now, to allocate the fixed costs to Brochure Center 2:

Fixed cost allocated to Brochure Center 2 = Predetermined overhead rate x Brochures made by Brochure Center 2

Brochures made by Brochure Center 2 = 120,000 (given)

Fixed cost allocated to Brochure Center 2 = $2 x 120,000 = $240,000 
However, we are told that $120,000 is considered a fixed cost. This means that only $24,000 (=$120,000/5) of the fixed costs should be allocated to Brochure Center 2 based on the activity level.

Therefore, the fixed costs allocated to Brochure Center 2 are $24,000 + $24,000 + $24,000 = $72,000.

Actual fixed costs incurred by the support department do not affect the allocation of fixed costs to the brochure centers.

FIGURE 7-5 Stronghold, Inc., Operates a Brochure Business at Two Different Locations