Allocating Service Department Costs—Fixed and Variable; Actual and Budgeted
“I get overcharged by the Printing Department each month,” declared Bud Perles, the manager of the Greene Company’s Advertising Department. “Even though my usage is down during the month, the total amount I have to pay keeps going up. The work done by our Printing Department is certainly high quality, but if these charges keep escalating, I’m going to start taking my business to outside printers.”
The Printing Department of the Greene Company provides services to many departments throughout the company. The cost budget for the Printing Department at a normal volume of 800 service hours as well as the actual expenses for September (when 700 hours were actually used) appear below:
BUDGET AT 800 HOURS | |||
| AMOUNT | FIXED (F) OR VARIABLE (V) | ACTUAL IN SEPTEMBER |
Labor | $ 10,000 | V | $ 9,000 |
Supervision | 2,000 | F | 2,000 |
Indirect labor | 3,000 | V | 2,800 |
Supplies | 11.000 | V | 10.500 |
Depreciation | 6,000 | F | 6,200 |
Rent | 4,000 | F | 4,500 |
Total | $36,000 |
| $35,000 |
Depreciation charged each month is a fixed percentage of the original cost of equipment installed in the Printing Department. The rental charge is an allocated share of total monthly building costs. The allocation is proportional to the space occupied by each department.
The cost of the Printing Department is charged to other users on the basis of average actual departmental costs during the month multiplied by the number of printing hours used during the month.
The Advertising Department of the Greene Company is a heavy user of the Printing Department’s services. Normally, the Advertising Department uses 100 hours each month from the Printing Department, but during September it used 95 hours. The quote at the beginning of the problem was made when Bud Perles received his bill for September usage from the Printing Department.
Required
(1) Compute the budgeted charge to the Advertising Department at normal volume. Also compute what the budgeted charge would be if the Advertising Department used 95 hours in a month (assume that total demand for the Printing Department remains constant at the budgeted 800 hours).
(2) Compute the actual charge from the Printing Department to the Advertising Department during September.
(3) Analyze the difference between what Advertising might have expected to pay at its normal volume of 100 hours and what it actually had to pay for the 95 hours it used during September. Indicate who is responsible for various differences between budgeted and actual costs.
(4) Comment on any changes you would recommend in charging for the Printing Department.
(5) Alice Deming, the manager of the Printing Department, responds to Perles’s criticism: “We do the best we can in controlling our costs, but it has been difficult because the number of hours we’ve been working has decreased over the past several years. At the same time, however, we’ve had to acquire more expensive and sophisticated printing equipment to handle the requests being made by the Advertising Department. That department has been a heavy user of these machines, which the other departments in the company hardly use. If anything, we should charge the Advertising Department more for our services.” How did this situation develop, and should a change in the pricing method for the Printing Department’s services be made in light of this new information?
We need at least 10 more requests to produce the solution.
0 / 10 have requested this problem solution
The more requests, the faster the answer.