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 $237,000 per year, consisting of $0.24 per ton variable cost and $187,000 fixed cost. The level of fixed cost is determined by peak-period requirements. During the peak period, the Northern Plant requires 58% of the Transport Services Department’s capacity and the Southern Plant requires 42%.

During the year, the Transport Services Department actually hauled the following amounts of ore for the two plants: Northern Plant, 115,000 tons; Southern Plant, 59,500 tons. The Transport Services Department incurred $365,000 in cost during the year, of which $53,300 was variable cost and $311,700 was fixed cost.

Required:

1. How much of the $53,300 in variable cost should be charged to each plant?

2. How much of the $311,700 in fixed cost should be charged to each plant?

3. How much of the $365,000 in the Transport Services Department cost should be treated as a spending variance and not charged to the plants?

Required 1 Required 2 Required 3 How much of the $53,300 in variable cost should be charged to each plant? Variable cost charged to Northern Plant Variable cost charged to Southern Plant

Answer 1

Requirement 1

The apportionment of variable costs shall be carried out at the activity level. 115,000 tonnes and 59,500 tonnes were transported by Northern and Southern Plants. The variable cost per tonne is given as $0.24

Variable cost allocation

Northern Plant = 115,000 * 0.24 = $ 27,600

Southern Plant = 59,500*0.24 =$ 14,280

Total 41,880 out of 53,300 shall be charged to each plants

Requirement 2

Fixed cost allocation shall be done on the basis of highest peak requirements of 58% and 42%.

Northern plant = 187,000*58%= $ 108,460

Southern plant = 187,000*42% = $ 78,540

Total $ 187000 out of 311,700 shall be charged as fixed cost to plants

Requirement 3

Total cost allocation is as

	Variable Cost	Fixed Cost
Northern Plant	$ 27,600	$ 108,460
Southern Plant	$ 14,280	$ 78,540
Total costs	41,880	187,000

The total cost charged to plants is 41,880 + 187,000 = $ 228,880

The total actual cost incurred is $ 365,000.

Spending variance is the difference between actual and budgeted costs. Spending variance here is responsibility of transport services department. The amount of spending variance as computed below shall not be charged to plants.

Hence, spending variance = 365,000 – 228,880 =$ 136,120.

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