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Chapter 15: Chapter 15

Problem 2

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Describe how the dual-rate method is useful to division managers in decision making.

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The dual-rate method is a cost allocation method that distinguishes between variable and fixed costs, allocating variable costs based on usage and fixed costs based on capacity. This method is useful to division managers in decision-making as it provides accurate and transparent cost allocations, enabling them to identify the impact of their decisions on both variable and fixed costs. It encourages accountability and efficient use of resources, serves as a performance evaluation tool, and supports continuous improvement by identifying areas for cost reduction and operational improvement.
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TABLE OF CONTENTS :
TABLE OF CONTENTS

Step 1: Introduction to Dual-Rate Method

The dual-rate method is a cost allocation method used in business management, particularly in organizations with multiple departments or divisions. It distinguishes between variable and fixed costs, allocating variable costs based on usage and fixed costs based on capacity. The dual-rate method provides better transparency and accountability in cost allocation, enabling division managers to make more informed and accurate decisions.

Step 1: Identifying Variable and Fixed Costs

Firstly, identify variable and fixed costs within the organization. Variable costs are those that change with the level of production or activity, whereas fixed costs remain consistent regardless of the production or activity level. Common examples of variable costs include raw materials, labor costs, and utility expenses, while fixed costs might include rent, insurance, and salaries of managerial staff.

Step 2: Allocating Variable Costs

Once variable and fixed costs have been identified, allocate variable costs to each division based on their usage. This can be done using various methods, such as direct labor hours, machine usage hours, or the number of units produced. By allocating variable costs based on usage, division managers gain a clear understanding of how their activities and decisions impact the overall costs of the organization.

Step 3: Allocating Fixed Costs

Next, allocate fixed costs to divisions based on capacity or predetermined rates. This part of the dual-rate method focuses on dividing fixed costs in a manner that reflects each division's contribution to the organization and ensures that each division bears its share of the overall fixed costs. In this way, division managers understand the need to manage their operations efficiently to minimize the fixed costs allocated to them.

Step 4: Analyzing Cost Allocations

Once variable and fixed costs have been allocated to each division, managers can analyze the results and make informed decisions. The dual-rate method provides valuable insights into the areas where costs can be reduced, enabling division managers to prioritize resources, identify inefficiencies, and take corrective actions where necessary.

Step 6: Benefits of Dual-Rate Method to Division Managers

In conclusion, the dual-rate method is useful to division managers in decision-making for several reasons: 1. It distinguishes between variable and fixed costs, providing more accurate and transparent cost allocations. 2. It enables division managers to identify the impact of their decisions on both variable and fixed costs. 3. It encourages accountability and efficient use of resources, as division managers are held responsible for costs allocated to their divisions. 4. It can be used as a performance evaluation tool, as cost allocations can be compared to budget targets or industry benchmarks. 5. Finally, the dual-rate method supports continuous improvement, as division managers can use the cost allocation data to identify areas for cost reduction and overall operational improvement.

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Most popular questions from this chapter

Chapter 15

Gordon Grimes, a self-employed consultant near Atlanta, received an invitation to visit a prospective client in Seattle. A few days later, he received an invitation to make a presentation to a prospective client in Denver. He decided to combine his visits, traveling from Atlanta to Seattle, Seattle to Denver, and Denver to Atlanta. Grimes received offers for his consulting services from both companies. Upon his return, he decided to accept the engagement in Denver. He is puzzled over how to allocate his travel costs between the two clients. He has collected the following data for regular round-trip fares with no stopovers: Grimes paid \(\$ 900\) for his three-leg flight (Atlanta-Seattle, Seattle- Denver, Denver-Atlanta). In addition, he paid \(\$ 45\) each way \((\$ 90\) total ) for limousines from his home to Atlanta Airport and back when he returned. 1\. How should Grimes allocate the \(\$ 900\) airfare between the clients in Seattle and Denver using (a) the stand-alone cost-allocation method, (b) the incremental cost-allocation method, and (c) the Shapley value method? 2\. Which method would you recommend Grimes use and why? 3\. How should Grimes allocate the \(\$ 90\) limousine charges between the clients in Seattle and Denver?
Chapter 15

Distinguish between two methods of allocating common costs.
Chapter 15

What is conceptually the most defensible method for allocating support- department costs? Why?
Chapter 15

E-books, an online book retailer, has two operating departments corporate sales and consumer sales-and two support departments - human resources and information systems. Each sales department conducts merchandising and marketing operations independently. E-books uses number of employees to allocate human resources costs and processing time to allocate information systems costs. The following data are available for September 2017 : 1\. Allocate the support departments' costs to the operating departments using the direct method. 2\. Rank the support departments based on the percentage of their services provided to other support departments. Use this ranking to allocate the support departments' costs to the operating departments based on the step-down method. 3\. How could you have ranked the support departments differently?
Chapter 15

Distinguish between the stand-alone and the incremental revenue-allocation methods.
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