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.

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 $58 per employee. Fixed Medical Services Department costs are budgeted at $628,200 per year. Actual Medical Services Department costs for the most recent year were $106,600 for variable costs and $634,000 for fixed costs. Data concerning employees in the three operating departments follow:

	Cutting	Milling	Assembly
Budgeted number of employees	613	298	903
Actual number of employees for the most recent year	513	398	803
Long-run average number of employees	720	480	1,200

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 be treated as a spending variance and not charged to the operating departments?

Explanation

1.

	Long-Run Average Number of Employees	Percentage
Cutting Department	720	30	%
Milling Department	480	20	%
Assembly Department	1,200	50	%
Total	2,400	100	%

	Cutting		Milling		Assembly
Variable cost charges:
$58 per employee × 513 employees	$	29,754
$58 per employee × 398 employees			$	23,084
$58 per employee × 803 employees					$	46,574
Fixed cost charges:
30% × $628,200		188,460
20% × $628,200				125,640
50% × $628,200						314,100
Total charges	$	218,214	$	148,724	$	360,674

2.

Part of the total actual cost should not be charged to the operating departments as shown below:

	Variable Cost		Fixed Cost		Total
Total actual costs incurred	$	106,600	$	634,000	$	740,600
Total charges		99,412		628,200		727,612
Spending variance	$	7,188	$	5,800	$	12,988

The overall spending variance of $12,988 represents costs incurred in excess of the budgeted variable cost of $58 per employee and the budgeted fixed cost of $628,200. This $12,988 in uncharged costs is the responsibility of the Medical Services Department.

Thanks