Question

Korvanis Corporation operates a Medical Services Department for its employees. Charges to the company’s operating departments for the variable costs of the Medical Services Department are based on the actual number of employees in each department. Charges for the fixed costs of the Medical Services Department are based on the long-run average number of employees in each operating department. Variable Medical Services Department costs are budgeted at $58 per employee. Fixed Medical Services Department costs are budgeted at $619,000 per year. Actual Medical Services Department costs for the most recent year were $106,800 for variable costs and $624,000 for fixed costs. Data concerning employees in the three operating departments follow: Cutting Milling Assembly Budgeted number of employees 616 287 905 Actual number of employees for the most recent year 516 387 805 Long-run average number of employees 990 660 1,650 Required: 1. Determine the Medical Services Department charges for the year to each of the operating departments—Cutting, Milling, and Assembly. 2. How much, if any, of the actual Medical Services Department costs for the year should not be charged to the operating departments?

Answer 1

1.

	Cutting	Milling	Assembly
Variable cost charges	29928	22446	46690
	($58 x 516)	($58 x 387)	($58 x 805)
Fixed cost charges*	185700	123800	309500
	(30% x $619000)	(20% x $619000)	(50% x $619000)
Total charges for the year $	215628	146246	356190

*The fixed costs are charged in the ratio of the long-run average number of employees which is 990:660:1650. Thus, the percentage of fixed costs charged to Cutting are 990/(990+660+1650) = 990/3300 = 30%. Similarly, for Milling it is 660/3300 = 20% and for Assembly it is 1650/3300 = 50%.

2.

	Variable costs	Fixed costs	Total
Total actual costs incurred	106800	624000	730800
Costs charged	99064	619000	718064
Difference $	7736	5000	12736

The actual Medical Services Department costs for the year not charged to the operating departments is $12736.