Q1) Northstar Company has two operating divisions-Machine Tools and Special Products. Company has a maintenance department that services equipment in both divisions. Costs of operating maintenance department are budgeted at $80,000 per month plus $0.50 per machine-hour. Fixed costs of maintenance department are determined by peak-period requirements. Machine Tools Division needs 65% of peak-period capacity, and Special Product Division requires 35%.
For October, Machine Tools Division evaluated that it would operate at 90,000 machine-hours of activity and Special Product Division evaluated that it would operate at 60,000 machine-hours of activity. Though, due to labor unrest and unexpected strike, Machine Tools Division worked only 60,000 machine-hours during month. Special Product Division worked 60,000 machine-hours as planned.
Cost records in maintenance department show that actual fixed cost for October totaled $85,000 and that actual variable cost totaled $78,000.
Questions:
1. How much maintenance department cost must be charged to each division for October?
2. Suppose that company follows practice of allocating all maintenance department costs incurred each month to divisions in proportion to actual machine-hours recorded in each division for month. On this basis, how much cost would be assigned to each division for October?
3. What criticisms can you make of allocation method used in part (2) above?
4. If managers of operating departments know that fixed service costs are going to be assigned on the basis of peak-period requirements, determine their probable strategy as they report their estimate of peak-period needs to company's budget committee? As a member of top management, what would you do to neutralize any such strategies?