The company has a separate division for each of its two products: dark chocolate and milk chocolate. Premium Candy purchases ingredients from Wisconsin for its dark chocolate division and from Louisiana for its milk chocolate division. Both locations are the same distance from Premium Candy Palo Alto plant. Premium Candy Inc. operates a fleet of trucks as a cost center that charges the divisions for variable costs (drivers and fuel) and fixed costs (vehicle depreciation, insurance, and registration fees) of operating the fleet. Each division is evaluated on the basis of its operating income. For 2017, the trucking fleet had a practical capacity of 65 round-trips between the Palo Alto plant and the two suppliers. It recorded the following information:
Budgeted Actual
Costs of truck fleet $149,500 $120,000
Number of round-trips for dark chocolate division 35 35
Palo Alto plant - Wisconsin)
Number of round-trips for milk chocolate division 30 25
(Palo Alto plant - Louisiana)
1. Using the single-rate method, allocate costs to the dark chocolate division and the milk chocolate division in these three ways.
a. Calculate the budgeted rate per round-trip and allocate costs based on round-trips budgeted for each division.
b. Calculate the budgeted rate per round-trip and allocate costs based on actual round-trips used by each division.
c. Calculate the actual rate per round-trip and allocate costs based on actual round-trips used by each division.
2. Describe the advantages and disadvantages of using each of the three methods in requirement 1. Would you encourage Premium Candy Inc. to use one of these methods? Explain and indicate any assumptions you made.