Question

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	$	362,400	*	$	465,120
Fixed costs for salaries and other	$	185,000		$	198,500

*Budgeted at $24 per machine-hour.

Data for the Forming and Assembly Departments follow:

	Percentage of Peak-Period Capacity Required	Machine-Hours
		Budget	Actual
Forming Department	72%	9,800	11,800
Assembly Department	28%	5,300	4,300
Total	100%	15,100	16,100

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

Required:

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

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

Beginning-of-year allocations of variable costs are computed by multiplying the budgeted rate by the actual level of activity.. Fixed costs are allocated in lump-sum amounts based on the peak-period needs of the using departments. The computations are:

Particular	Forming Department	Assembly Department	TOTAL
Variable costs:
$24 per machine-hour x 11800 machine-hours	2,83,200
$24 per machine-hour x 4,300machine-hours		1,03,200
Total Variable Cost			3,86,400
Fixed costs:
72% $185000	1,33,200
28% x $185000		51,800	1,85,000
Total cost allocated (Variable costs + Fixed costs)	4,16,400	1,55,000	5,71,400

^* variable charges = Actual Machine Hour x Variable cost per unit / Budgeted cost

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?

Any difference between the budgeted and actual variable cost per machine-hour or between the budgeted and actual total fixed cost would not be allocated to the other departments. The amount not allocated would be:

Spending variance = Actual cost - Budgeted cost or Cost Allocated

	Variable cost	Fixed cost	Total
Actual cost incurred during the year	4,65,120	1,98,500	6,63,620
Cost allocated ( calculated as above)	3,86,400	1,85,000	5,71,400
Cost not allocated (spending variance)	78,720	13,500	92,220

Spending variance are as follow

Variable spending variance =78,720

Fixed spending variance =13,500

Total spending variance =92,220

The costs not allocated are spending variances of the Maintenance Department and are the responsibility of the Maintenance Department's manager.