ALLOCATING COSTS OF SUPPORT DEPARTMENTS

- SINGLE AND DUAL CHARGING RATES-

ASSIGNMENT

1. James Beard owns a block of shops on a street just off Rodeo Drive. Of the 10 store
spaces in the building, seven are rented by boutique owners, and three are vacant. James
has decided that offering more services to stores in the mall would enable him to increase
occupancy. He has decided to use one of the vacant spaces to provide, at cost, a gift
wrapping service to shops in the mall. The boutiques are enthusiastic about the new
service. Most of them are staffed minimally, which means that every time they have to
wrap a gift, phones go unanswered and other customers in line grow impatient. James
figured that the gift-wrapping service would incur the following costs: The store space
would normally rent for $2,000 per month; part-time gift wrappers could be hired for
$1,000 per month; and wrapping paper and ribbon would average $1.50 per gift. The
boutique owners estimated the following number of gifts to be wrapped per month.
Number of Gifts
Store Wrapped per Month
The Paper Chase 175
Reservation Art 400
Kid-Sports 100
Sugar Shack 75
Designer Shoes 20
Boutique de Donatessa 130
Alan’s Drug and Sundries 100

After the service had been in effect for six months. James calculated the following actual
average monthly number of gifts wrapped for each of the stores.
Actual Average Number of
Store Gifts Wrapped per Month
The Paper Chase 170
Reservation Art 310
Kid-Sports 240
Sugar Shack 10
Designer Shoes 50
Boutique de Donatessa 200
Alan’s Drug and Sundries 450

Required:
a. Calculate a single charging rate, on a per-gift basis, to be charged to the shops. Based
on the shops’ actual number of gifts wrapped, how much be charged to each shop
using the single charging rate?
b. Based on the shops’ actual number of gifts wrapped, how much would be changed to
each shop using the dual charging rate?
c. Which shops would prefer the single charging rate? Why? Which would prefer the
dual charging rate, and why?
d. Several of the shop owners were angry about their bill for the gift-wrapping service.
They pointed out that they were to be charged only for the cost of the service. How
could you make a case for them?

a. Single charging rate = [($2,000+ $1,000)/1,000*] + $1.50

= $4.50 per gift
 *175 + 400 + 100 + 75 + 20 + 130 + 100 = 1,000

Store Number of Charging = Total

Gifts x Rates
The Paper Chase 170 $ 4.50 $ 765
Reservation Art 310 4.50 1,395
Kid-Sports 240 4.50 1,080
Sugar Shack 10 4.50 45
Designer Shoes 50 4.50 225
Boutique de Donatessa 200 4.50 900
Alan’s Drug and Sundries 450 4.50 2,025
Totals 1,430 $ 5,435

b.
Number of Allocated Fixed
Store Gifts Percent = Amount*
The Paper Chase 175 17,50% 525
Reservation Art 400 40% 1200
Kid-Sports 100 10% 300
Sugar Shack 75 7,50% 225
Designer Shoes 20 2% 60
Boutique de Donatessa 130 13% 390
Alan’s Drug and Sundries 100 10% 300
Totals 1,000 100% $ 3,000

* Allocated fixed ammount = precent x $3,000

Variable rate = $1.50 per gift

The Paper Chase 170 $ 255 $ 525 $ 780

Reservation Art 310 465 1200 1,665
Kid-Sports 240 360 300 660
Sugar Shack 10 15 225 240
Designer Shoes 50 75 60 135
Boutique de Donatessa 200 300 390 690
Alan’s Drug and Sundries 450 675 300 1,005
Totals 1,430 2.145 3.000 $ 5,175

c. The shops that actually use the gift-wrapping service less than anticipated would
like the single charging rate. The single charging rate assigns less of the fixed cost
to the shops using less of the service. Sugar Shack’s originally anticipated having
75 gifts wrapped per month but actually had only 10 gifts wrapped. Under the
single charging rate, Sugar Shack’s pays $45; under the dual charging rate, it pays
 $240

The dual charging rate method is preferred by shops that use the service as much
as or more than anticipated. Alan’s Drug and Sundries had a much greater use for
the service and would be charged $975 under the dual rate but $2,025 under the
single rate.

d. Despite the charging rate method, James may be overcharging by overestimating

his fixed costs. The space used by the gift-wrapping service is one of three vacant
spaces. The opportunity cost of using it to wrap gifts is zero. Until the ninth space
is rented and there is an occupant for the tenth, perhaps the fixed cost should
include only the wages paid to the gift wrappers