Chapter 12 Segment Reporting and Decentralization True/False Questions

The spending variance represents the difference between the Customer Service Department’s actual costs and what those costs should have been, given the actual level of activity. This difference is properly the responsibility of the Customer Service Department and should not be charged to the operating divisions.

	Maintenance Department
	Budgeted variable cost	$7 per case
	Budgeted total fixed cost	$600,000
	Actual total variable cost	$432,072
	Actual total fixed cost	$602,860
	Paints Division
	Percentage of peak period capacity required	30%
	Budgeted cases	15,000
	Actual cases	15,020
	Stains Division
	Percentage of peak period capacity required	70%
	Budgeted cases	45,000
	Actual cases	44,990

Required:

1. 
   Prepare a report showing how much of the Maintenance Department's costs should be charged to each of the operating divisions at the end of the year.
   
2. 
   How much of the actual Maintenance Department costs should not be charged to the operating divisions at the end of the year? Who should be held responsible for these uncharged costs?
   

Ans:

1. 
   The amount of cost that would be charged to each of the operating divisions at the end of the year would be as follows:
   

		Paints Division	Stains Division
	Variable cost allocation:
	$7 × 15,020 orders	$105,140
	$7 × 44,990 orders		$314,930
	Fixed cost allocation:
	30% × $600,000	180,000
	70% × $600,000		420,000
	Total cost charged	$285,140	$734,930

2. 
   The uncharged costs are:
   

		Variable	Fixed
	Total actual costs incurred	$432,072	$602,860
	Costs charged	420,070	600,000
	Spending variance	$12,002	$2,860

The spending variance represents the difference between the Maintenance Department’s actual costs and what those costs should have been, given the actual level of activity. This difference is the responsibility of the Maintenance Department and should not be charged to the operating divisions.