2011 Term Test

Posh Department Store offers a free gift-wrapping service for its customers. Posh’s customer-service department has practical capacity to wrap 10,000 gifts at a budgeted fixed cost of $9,000 per month. The average budgeted variable cost to gift-wrap an item is $0.50. Although the service is free to customers, a gift-wrapping cost allocation is made to the department where the item was purchased. The customer service department reported the following data for the most recent month:

|Department |Actual Number of Gifts Wrapped |Budgeted Number of Gifts to be |Practical Capacity available |

| | |Wrapped |for Gift Wrapping |

|Children’s Wear |2,800 |3,300 |3,500 |

|Men’s Wear |1,000 |1,100 |1,250 |

|Women’s Wear |2,100 |2,400 |2,625 |

|Gourmet Food | 700 | 600 | 875 |

|Housewares |1,400 |1,600 |1,750 |

A month later, the actual cost of the gift-wrapping service was recorded at $12,500.

Required:

1. Using the single-rate method, allocate gift-wrapping costs to the different departments in the following 3 alternative ways:

a. Use a budgeted rate based on the budgeted number of gifts to be wrapped and allocate costs based on the budgeted use (of gift-wrapping services)

b. Use a budgeted rate based on the budgeted number of gifts to be wrapped and allocate costs based on actual usage

c. Use a budgeted rate based on the practical gift-wrapping capacity...