Actual Variable Cost Allocation Question Need Help Today Part 2

Question

Matthew Corporation's Maintenance Department provides services to the company's two operating divisions - the Paints division and the Stains Division. The variable costs of the Maintenance Department are budgeted based on the number of cases produced by the operating departments. The fixed costs of the Maintenance Department are determined by the number of cases produced by the operating departments during the peak demand period. Data appear below :

Maintenance Department :

Budgeted Total Variable Cost : $246,000

Budgeted Total Fixed Cost : $328,000

Actual Total Variable Cost : $254,014

Actual Total Fixed Cost : $331,940

 

Paints Division :

Percentage of Peak Capacity Required : 35%

Budgeted Cases : 12,000

Actual Cases : 12,010

 

Stains Division :

Percentage of Peak Capacity Required : 65%

Budgeted Cases : 29,000

Actual Cases : 28,960

 

Question : How much of the Maintenance Department's actual variable costs SHOULD NOT be allocated to the operating divisions at the end of the year for performance evaluation purposes?

 

A) $12,606 B) $8,250 C) $8,014 D) $8,194 E) $12,134

 

Answer was D) but I need help with steps as to how and why.

 

Answer 1

Use the budgeted variable cost per case first:

1. Total budgeted cases = 12,000 + 29,000 = 41,000
2. Budgeted variable cost rate = $246,000 ÷ 41,000 = $6 per case

Then use actual total cases:

1. Actual cases = 12,010 + 28,960 = 40,970

Variable cost that should be allocated:

1. 40,970 × $6 = $245,820

Actual variable cost was $254,014

So the amount that should NOT be allocated is:

1. $254,014 - $245,820 = $8,194

Answer: D) $8,194

For performance evaluation, the divisions should only be charged based on the budgeted variable rate × actual activity. The extra $8,194 is Maintenance’s overspending, so it should not be pushed onto the divisions.