Hannibal Steel Company has a Transport Services Department that provides trucks
ID: 2711606 • Letter: H
Question
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 $214,500 per year, consisting of $0.18 per ton variable cost and $164,500 fixed cost. The level of fixed cost is determined by peak-period requirements. During the peak period, the Northern Plant requires 59% of the Transport Services Department’s capacity and the Southern Plant requires 41%. During the year, the Transport Services Department actually hauled the following amounts of ore for the two plants: Northern Plant, 126,000 tons; Southern Plant, 52,500 tons. The Transport Services Department incurred $371,000 in cost during the year, of which $52,300 was variable cost and $318,700 was fixed cost.
Determine how much of the $52,300 in variable cost should be charged to each plant.
Determine how much of the $318,700 in fixed cost should be charged to each plant.
3. Should any of the $371,000 in the Transport Services Department cost not be charged to the plants?
Show work please!
1.Determine how much of the $52,300 in variable cost should be charged to each plant.
2.Determine how much of the $318,700 in fixed cost should be charged to each plant.
3. Should any of the $371,000 in the Transport Services Department cost not be charged to the plants?
Show work please!
Explanation / Answer
1. Apportionment of variable cost should be done on the activity levels of the 2 plants. As we have seen the Northern and Southern plant have hauled 126,000 and 52,500 tons (total of 178,500 tons) respectively. Therefore the variable cost of $54300 should be approtioned in this ratio.
Variable Cost allocation
Northern Plant : 52300 x 126000/178500 = $36,918
Southern Plant : 52300 x 52500/178500 = $ 15,382
Fixed Cost allocation
Fixed Cost allocation is determined by the peak period requirements which is 59% for northern plant and 41% for southern plant. Therefore the fixed cost of $318,700 should be apportioned in this percentage.
Northern Plant : 318,700 x 59% = 188,033
Southern Plant : 318,700 x 41% = 130,667
Therefore the total allocation of cost stands as follows
Northern Plant : 36,918 + 188,033 = 224,951
Southern Plant : 15,382 + 130,667 = 146,049
Going by the above methodology of apportionment the entire cost of $371,000 should be divided between the 2 plants.
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