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 $192,500 per year, consisting of $0.24 per ton variable cost and $142,500 fixed cost. The level of fixed cost is determined by peak-period requirements. During the peak period, the Northern Plant requires 65% of the Transport Services Department’s capacity and the Southern Plant requires 35%. During the year, the Transport Services Department actually hauled 130,000 tons of ore to the Northern Plant and 56,900 tons to the Southern Plant. The Transport Services Department incurred $362,000 in cost during the year, of which $53,200 was variable cost and $308,800 was fixed cost.

Required: 1. How much of the Transport Services Department’s variable costs should be charged to each plant?

2. How much of the $308,800 in fixed cost should be charged to each plant?

3. Should any of the Transport Services Department’s actual total cost of $362,000 be treated as a spending variance and not charged to the plants?

Answer 1

Answer:
1)
	Amount
Variable cost charged to Northern plant               = (No. of tons hauled x Variable Cost per Ton)               = ( 130,000 tons x $ 0.24 )	$ 31,200
Variable cost charged to Southern plant               = (No. of tons hauled x Variable Cost per Ton)               = ( 56,900 tons x $ 0.24 )	$ 13,656
Total	$ 44,856
2)
Fixed cost charged to Northern Plant            = Fixed Cost x % of Allocation to Northern Plant            = $ 142,500 x 65%	$ 92,625
Fixed cost charged to Southern Plant            = Fixed Cost x % of Allocation to Southern Plant            = $ 142,500 x 35%	$ 49,875
Total	$ 142,500
3)
Total cost incurred ( $ 53,200 + $ 308,800)	$ 362,000
Less: Total Cost charged                 ( $ 142,500 + $ 44,856 )	($ 187,356)
Unallocated Cost	$ 174,644