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	$	325,600	*	$	417,280
Fixed costs for salaries and other	$	180,000		$	193,000

*Budgeted at $22 per machine-hour.

Data for the Forming and Assembly Departments follow:

	Percentage of Peak-Period Capacity Required	Machine-Hours
		Budget	Actual
Forming Department	75%	10,000	12,000
Assembly Department	25%	4,800	3,800
Total	100%	14,800	15,800

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

Required:

Management would like data to assist in comparing actual performance to planned performance in the Maintenance Department and in the other departments.

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?

Answer 1

Answer:

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

variable charges of forming department

=Machine Hour x Variable cost per unit

=12000x22

=264,000

variable charges of Assembly department

=Machine Hour x Variable cost per unit

=3800x22

=83600

Total Variable charges

=264000+83600

=347,600

Fixed cost of forming department

= 180,000 x75%

=135000

Fixed cost of Assembly department

= 180,000 x25%

=45000

Total Fixed cost

=135000+45000

=180,000

	Variable cost	Fixed cost
Forming department	264000	135000
Assembly department	83600	45000
Total Cost	347600	180000

___________________________________________________________________

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?

Spending variance = Actual cost - Budgeted cost

	Variable cost	Fixed cost	Total
Total Actual Cost incurred	417,280	193000	610,280
Total Charges ( calculated as above)	347600	180000	527,600
Spending Variance	69,680	13,000	82,680

Spending variance are as follow

Variable spending variance =69,680

Fixed spending variance =13,000

Total spending variance =82680