Hardy Inc. has two operating departments (1 and 2) and is considering renting a new machine to help automate the printing process. The normal rental for the machine is $25/hour, but for rentals that exceed 1,000 hours the rental rate drops to $22/hour. Operating Dept 1 needs the machine for 300 hours. Operating Dept 2 needs the machine for 900 hours. If Hardy uses the incremental method and Operating Department 2 is the primary user, how much of the cost will be allocated to Department 1

When you use the incremental cost allocation method, you must rank cost activities and how they will be allocated. In this case, department 2 is the primary user, and therefore, rental costs must be allocated first to them. Rental costs will be allocated at a $25/hour rate.

Since department 1 is the next user, 100 hours will be allocated using the same rate as department 2, but the next 200 hours will be allocated at the lower $22/hour rate. Total rental cost allocation to department 1 = (100 x $25) + (200 x $22) = $2,500 + $4,400 = $6,900

ayokenny2001 ayokenny2001 · Answer 2 · 2022-03-22T13:21:31+01:00

The cost that will be be allocated to Department 1 is $6,900

What is incremental cost?

Incremental costs are the extra costs, associated with the production of additional unit whilst taking those costs into consideration.

In using incremental cost allocation method, the cost activities must be ranked and cost allocation known.

Total rental cost allocation to department 1

= (100 x $25) + (200 x $22)

= $2,500 + $4,400

= $6,900

Hence, the cost that will be be allocated to Department 1 is $6,900

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