Carlson, Inc. has centralized much of its specialized data processing operation, with the Computer Department performing services for Departments A and B. Service hours consumed during Quarter No. 1 and Quarter No. 2 follow.?ABQuarter No. 16060Quarter No. 24060Computer Department operating costs were:?Variable (Per Hour)FixedQuarter No. 1$50$40,000Quarter No. 2 45 38,000Company policy currently requires that total variable and fixed costs be combined and allocated as a lump-sum to users based on service hours.Carlson has been financially healthy for a number of years but began to experience problems toward the end of Quarter No. 1. In response to these problems, management issued a directive to closely monitor costs and computer usage, effective with the start of Quarter No.
2.Required:A. Compute Quarter No. 1's total computer cost and determine the allocation to Department A and Department B.B. How much cost would be allocated to Departments A and B during Quarter No. 2, and how would the heads of these departments likely react to the allocations in light of management's directive?C. Assume that at the beginning of quarter no. 2, the company switched to dual-cost allocations, with variable costs allocated based on current usage and fixed costs allocated based on long-run average utilization. An analysis of projected usage found that work for Department A was expected to consume 55% of the Computer Department's time over the forthcoming year. How much cost would be allocated to A and B in Quarter No. 2?D. Given the use of dual allocations, how, if at all, would a short-term increase or decrease in A's current usage affect the quarterly cost allocation that is charged to Department B?
What will be an ideal response?
A.
| Variable cost: (60 + 60) × $50 | $6,000 |
| Fixed cost | 40,000 |
| Total cost | $46,000 |
Since each department consumed 60 hours of services, the cost would be split equally: $46,000 × 2 = $23,000.
B.
| Variable cost: (40 + 60) × $45 | $4,500 |
| Fixed cost | 38,000 |
| Total cost | $42,500 |
Department A: (40 ÷ 100) × $42,500 = $17,000
Department B: (60 ÷ 100) × $42,500 = $25,500
The head of A would be pleased because the department's decreased usage resulted in a $6,000 reduction in cost ($23,000 - $17,000). In contrast, the head of B would likely be unhappy. Although unable to reduce usage, usage did remain constant-a situation that produced a $2,500 increase in cost ($25,500 - $23,000) despite the fact that overall cost declined.
C.
| Variable: | ? | ? |
| 40 hours × $45 | $1,800 | ? |
| 60 hours × $45 | ? | $2,700 |
| Fixed: | ? | ? |
| $38,000 × 55% | 20,900 | ? |
| $38,000 × 45% | ? | 17,100 |
| Total | $22,700 | $19,800 |
D. There is no effect on B. The variable costs charged to Department A would increase or decrease, with other allocations remaining the same.
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