Santa Fe Corporation has two operating divisions-the Northeast Division and the

Question

Santa Fe Corporation has two operating divisions-the Northeast Division and the Southwest Division. The company's IT Department services both divisions. The variable costs of the IT Department are budgeted at $36 per hour of service. The IT Department's fixed costs are budgeted at $399,600 for the year. The fixed costs of the IT Department are determined based on peak-period demand. Percentage of Peak PeriodBudgeted Capacity Required Northeast Division Southwest Division 25% 75% Hours Actual Hours 1,6002,600 5,800 5,600 20 At the end of the year, actual IT Department variable costs totaled $305,040 and fixed costs totaled $418,680. For performance evaluation purposes, how much actual IT Department cost should NOT be charged to the operating divisions at the end of A. B. c. D. E. Noe of the above S 19,080 s 28,920 $ 9,840 S 57.720

Explanation / Answer

If the objective of the management is to fix the product's pricing, then the fixed overheads are allocated based on the budgeted rate. However, if the objective is Performance evaluation, then the fixed overheads are allocated as per "Actual cost" incurred at the end of the year.

Hence, we need to find out what is the cost allocation as per budgeted rate for Actual hours. Compare this with the Actual Fixed overheads. The net difference is the excess cost allocated, which need to be removed to evaluate the actual performance.

Now let us find out the excess or short allocation:

Hence, this excess amount of $14280 should not be allocated, if we want to evaluate the performance.

Hence, the answer is "E" (none of the above)

% of peak hrs demand Budgeted hrs Actual Hrs NE division 25% 1600 2600 SW division 75% 5800 5600 total hrs 7400 8200 Budgeted fixed o/h 399600 Budgeted Fixed overhead rate 54/hour Budgeted variable overhead rate 36/hour

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.