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FIXED COSTS AND ALLOCATED COSTS for a maintenance department

Number 1
The maintenance department's costs are allocated to other departments based on the number of hours of maintenance used by each department. The maintenance department has fixed costs of $500,000 and variable costs of $30 per hour of maintenance provided. The variable costs include the salaries of the maintenance workers. More maintenance workers can be added if greater maintenance is demanded by the other depts. Without affecting the fixed costs of the maintenance department. The maintenance dept expects to provide 10,000 hours of maintenance.

Required: - I must have the mathematical calculations.

a. What is the application rate for the maintenance department? This would be the same as factory overhead rate (OHR)? The formula we used was
OHR= budget FOH $ / Budget volume = FC + VC p/unit / budget volume

b. What is the additional cost to the maintenance dept of providing another hour of maintenance to be performed?

c. What problem exists if the managers of other departments can choose how much maintenance to be performed?

d. What problem exists if the other departments are allowed to go outside the organization to buy maintenance services?

Solution Preview

Number 1
The maintenance department's costs are allocated to other departments based on the number of hours of maintenance used by each department. The maintenance department has fixed costs of $500,000 and variable costs of $30 per hour of maintenance provided. The variable costs include the salaries of the maintenance workers. More maintenance workers can be added if greater maintenance is demanded by the other depts., without affecting the fixed costs of the maintenance department. The maintenance dept expects to provide 10,000 hours of maintenance.

Required: - I must have the mathematical calculations.

a. What is the application rate for the maintenance department? This would be the same as factory overhead rate (OHR)? The formula we used was
OHR= budget FOH $ / Budget volume = FC + VC p/unit / budget volume
=500,000/10,000 + 30 ...

Solution Summary

The solution carefully answers the questions with formulas, calculations and narrative explanations.

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