Question

Hannibal Steel Company has a Transport Services Department that provides trucks to haul ore from the company’s mine to its two steel mills—the Northern Plant and the Southern Plant. Budgeted costs for the Transport Services Department total $225,300 per year, consisting of $0.25 per ton variable cost and $175,300 fixed cost. The level of fixed cost is determined by peak-period requirements. During the peak period, the Northern Plant requires 55% of the Transport Services Department’s capacity and the Southern Plant requires 45%.

During the year, the Transport Services Department actually hauled the following amounts of ore for the two plants: Northern Plant, 111,000 tons; Southern Plant, 68,100 tons. The Transport Services Department incurred $377,000 in cost during the year, of which $52,200 was variable cost and $324,800 was fixed cost.

Required:

1. How much of the $52,200 in variable cost should be charged to each plant?

2. How much of the $324,800 in fixed cost should be charged to each plant?

3. How much of the $377,000 in the Transport Services Department cost should be treated as a spending variance and not charged to the plants?

Answer 1

Solution:

1) Variable cost should be charged to each plant.

Variable cost charged to Northern plant =$0.25 * 111,000=$27,750

Variable cost charged to Southern plant =$0.25*68,100 =$17,025

Total variable cost charged =$ 44,775

2)Fixed cost should be charged to each plant.

Fixed cost charged to Northern Plant =$175,300*55% =$96,415

Fixed cost charged to Southern Plant =$175,300*45% =$78,885

Total Fixed cost charged   =$175,300

3) If $377,000 in the transport services department cost not be charged to the plants :

Unallocated Cost:

Total cost incurred($52,200+324,800)                   =$377,000

Less: Total Variable cost charged                         =($44,775)

Less: Total Fixed cost charged                            =($175,300)                          

Cost not to be charged                                        =$157,225