Korvanis Corporation operates a Medical Services Department for its employees. C

Question

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 $57 per employee. Fixed Medical Services Department costs are budgeted at $617,100 per year. Actual Medical Services Department costs for the most recent year were $106,200 for variable costs and $623,000 for fixed costs. Data concerning employees in the three operating departments follow:

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 not be charged to the operating departments?

Cutting Milling Assembly Budgeted number of employees 617 288 903 Actual number of employees for the most recent year 517 388 803 Long-run average number of employees 1,200 800 2,000

Explanation / Answer

1) Percentage of Long Run Average no. of employee in each department.

Calculation of Overhead charges for each department (Amount in $)

2) Part of actual cost that should not be allocated is shown as follows (Amount in $)

The overall spending variance of $14,744 represents costs incurred in excess of the budgeted variable cost of $57 per employee and the budgeted fixed cost of $617,100. This $14,744 in uncharged costs is the responsibility of the Medical services department.

Particulars Cutting Milling Assembly Total Long Run Average no. of employee 1,200 800 2,000 4,000 Percentage 30% 20% 50% 100%

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