Hannibal Steel Company has a Transport Services Department that provides trucks to haul ore from the company’s mine to its two steel mills—the Northern Plant and the Southern Plant. Budgeted costs for the Transport Services Department total $255,500 per year, consisting of $0.19 per ton variable cost and $205,500 fixed cost. The level of fixed cost is determined by peak-period requirements.

Hannibal Steel Company has a Transport Services Department that provides trucks to haul ore from the company’s mine to its two steel mills—the Northern Plant and the Southern Plant. Budgeted costs for the Transport Services Department total $255,500 per year, consisting of $0.19 per ton variable cost and $205,500 fixed cost. The level of fixed cost is determined by peak-period requirements. During the peak period, the Northern Plant requires 52% of the Transport Services Department’s capacity and the Southern Plant requires 48%.

During the year, the Transport Services Department actually hauled the following amounts of ore for the two plants: Northern Plant, 114,000 tons; Southern Plant, 53,400 tons. The Transport Services Department incurred $365,000 in cost during the year, of which $53,600 was variable cost and $311,400 was fixed cost.

Required:

1. How much of the $53,600 in variable cost should be charged to each plant?

2. How much of the $311,400 in fixed cost should be charged to each plant?

3. How much of the $365,000 in the Transport Services Department cost should be treated as a spending variance and not charged to the plants?

Explanation

1. & 2.

	Northern Plant			Southern Plant			Total
Variable cost charges:
$0.19 per ton × 114,000 tons	$	21,660
$0.19 per ton × 53,400 tons				$	10,146		$	31,806
Fixed cost charges:
52% × $205,500		106,860
48% × $205,500					98,640			205,500
Total charges	$	128,520		$	108,786		$	237,306

3.

Part of the $365,000 in total cost will not be charged to the plants, as follows:

	Variable Cost			Fixed Cost			Total
Total actual cost incurred	$	53,600		$	311,400		$	365,000
Total charges (above)		31,806			205,500			237,306
Spending variance	$	21,794		$	105,900		$	127,694

The overall spending variance of $127,694 represents costs incurred in excess of the budgeted $0.19 per ton variable cost and budgeted $205,500 in fixed costs. This $127,694 in uncharged cost is the responsibility of the Transport Services Department.

Thanks