Chapter 11, Problem 11.22P

Service Department Charges LO 11–4

Sharp Motor Company has two operating divisions—an Auto Division and a Truck Division. The company has a cafeteria thatserves the employees of both divisions. The costs of operating the cafeteria are budgeted at $40,000 per month plus $3 per mealserved. The company pays all the cost of the meals.

The fixed costs of the cafeteria are determined by peak-period requirements. The Auto Division is responsible for 65% of thepeak-period requirements, and the Truck Division is responsible for the other 35%.

For June, the Auto Division estimated it would need 35,000 meals served, and the Truck Division estimated it would need20,000 meals served. However, due to unexpected layoffs of employees during the month, only 20,000 meals were served to theAuto Division. Another 20,000 meals were served to the Truck Division as planned.

The cafeteria’s actual fixed costs for June totaled $42,000, and its actual meal costs totaled $128,000.

Required:

1. How much cafeteria cost should be charged to each division for June?
2. Assume the company follows the practice of allocating all cafeteria costs incurred each month to the divisions in proportion tothe number of meals served to each division during the month. On this basis, how much cost would be allocated to each division for June?
3. What criticisms can you make of the allocation method used in part (2) above?
4. If managers of operating departments know that fixed service costs are going to be allocated on the basis of peak-periodrequirements, what will be their probable strategy as they report their estimate of peak-period requirements to the company’sbudget committee? As a member of top management, what would you do to neutralize such strategies?