A factory averages total employment of 700 people. The administrative department averages 150 people. The company operates a cafeteria with capacity to serve all employees. The cafeteria’s monthly costs are $12,000 plus $2.50 per meal served. In July the factory was closed for retooling. During July, the cafeteria provided 3,200 meals to administrative personnel and 1,000 meals to factory employees.
A. Using the single-rate method, allocate the cafeteria costs to factory and administration based on actual meals served during July.
B. Using the dual-rate method, allocate the cafeteria costs to factory and administration based on actual meals served during July.
C. List the pros and cons of using the single-rate allocation method.
D. Would the managers of the administrative department prefer the single-rate method or the dual-rate method? Explain.
E. Should the fixed costs for the cafeteria be allocated in July if it causes the administrative department’s costs to exceed its budget?