Question

The maintenance department's costs are allocated to other departments based on the number of hours of maintenance use by each department. The maintenance department has fixed costs of $500,000 and variable costs of $30 per hour of maintenance provided. The variable costs include the salaries of the maintenance workers. More maintenance workers can be added if greater maintenance is demanded by the other departments without affecting the fixed costs of the maintenance department. The maintenance department expects to provide 10,000 hours of maintenance.

a. What is the predetermined overhead rate for the maintenance department?
b. What is the additional (marginal) cost to the maintenance department of providing another hour of maintenance? )
c. What problem exists if the managers of other departments can choose how much maintenance to be performed?
d. What problem exists if the other departments are allowed to go outside the organization to buy maintenance services?

Answer 1

1	Fixed manufacturing overheads	500000
	Hours of maintenance	10000
	Fixed overhead per hour	50
	Variable overhead per hour	30
	Predtermined overhead rate	80	Per hour
2	Additional hour will cost variable overheads per hour	30	per hour
3	Manager of other department will include as 80 per hour for additional hour
	Wheras the marginal cost per hour is $30 per hour
4	If choosen outside maintenenace then fixed cost will apply