Question

Exercise 11-15 (Algo) Service Department Charges [LO11-4]

Korvanis Corporation operates a Medical Services Department for its employees. Charges to the company’s operating departments for the variable costs of the Medical Services Department are based on the actual number of employees in each department. Charges for the fixed costs of the Medical Services Department are based on the long-run average number of employees in each operating department.

Variable Medical Services Department costs are budgeted at $58 per employee. Fixed Medical Services Department costs are budgeted at $658,300 per year. Actual Medical Services Department costs for the most recent year were $106,300 for variable costs and $664,000 for fixed costs. Data concerning employees in the three operating departments follow:

Cutting Milling Assembly
Budgeted number of employees 615 289 914
Actual number of employees for the most recent year 515 389 814
Long-run average number of employees 870 580 1,450
Required:

1. Determine the Medical Services Department charges for the year to each of the operating departments—Cutting, Milling, and Assembly.

2. How much, if any, of the actual Medical Services Department costs for the year should be treated as a spending variance and not charged to the operating departments?

Answer 1

To determine the Medical Services Department charges for each operating department, multiply the actual number of employees with the budgeted rate for variable costs and the long-run average number of employees with the budgeted fixed cost.

Step-by-step explanation:

To determine the Medical Services Department charges for each operating department, we need to calculate the variable and fixed charges based on the number of employees in each department.

For the variable costs, we will multiply the actual number of employees in each department with the budgeted rate of $58 per employee. For example, the variable charge for the Cutting department would be 515 x $58 = $29,870.

For the fixed costs, we will multiply the long-run average number of employees in each department with the budgeted fixed cost. For example, the fixed charge for the Milling department would be 580 x $658,300 = $381,314,400.