Question

Problem 11B-5 Service Department Charges [LO11-6]

Tasman Products, Ltd., of Australia has a Maintenance Department that services the equipment in the company’s Forming Department and Assembly Department. The cost of this servicing is charged to the operating departments on the basis of machine-hours. Cost and other data relating to the Maintenance Department and to the other two departments for the most recent year are presented below.

Data for the Maintenance Department follow:

	Budget			Actual
Variable costs for lubricants	$	96,000	*	$	110,000
Fixed costs for salaries and other	$	150,000		$	153,000

*Budgeted at $0.40 per machine-hour.

Data for the Forming and Assembly Departments follow:

	Percentage of Peak-Period Capacity Required	Machine-Hours
		Budget	Actual
Forming Department	70%	160,000	190,000
Assembly Department	30%	80,000	70,000
Total	100%	240,000	260,000

The level of fixed costs in the Maintenance Department is determined by peak-period requirements.

Required:

Management would like data to assist in comparing actual performance to planned performance in the Maintenance Department and in the other departments.

1. How much Maintenance Department cost should be charged to the Forming Department and to the Assembly Department?

2. How much, if any, of the actual Maintenance Department costs for the year should be treated as a spending variance and not charged to the Forming and Assembly departments?

How much Maintenance Department cost should be charged to the Forming Department and to the Assembly Department?

	Forming Department	Assembly Department
Total cost charged

How much, if any, of the actual Maintenance Department costs for the year should be treated as a spending variance and not charged to the Forming and Assembly departments?

Spending variance

Answer 1

	Forming Department	Assembly Department	Total
Variable cost :
190,000 - Machine Hours ($0.4 x 190,000)	$76,000		$76,000
70,000 - Machine Hours ($0.4 x 70,000)		$28,000	$28,000
Fixed Costs :
70% of   $150,000	$105,000		$105,000
30% of   $150,000		$45,000	$45,000
Total Cost Charged	$181,000	$73,000	$254,000
Calculation of Spending Variance
	Variable cost	Fixed Cost	Total
Actual Cost incurred (A)	$ 110,000	$ 153,000	$263,000
Total Cost Charged (B)	$181,000	$73,000	$254,000
Spending Variance [(A) - (B)] (Non charged Costs)	($71,000)	$80,000	$11,000
It is the responsibility of the Maintenance department manager to not charge Spending variance cost to maintenance department