Shambern, Inc., evaluates managers of producing departments on their ability to control costs. In addition to the costs directly traceable to their departments, each production man¬

ager is held responsible for a share of the costs of a support center, the Power Department.

The total costs of the Power Department are allocated on the basis of actual machine hours used. The total costs of power and the actual machine hours used by each producing de¬

partment are given below.

Required:
1. Allocate the power costs to each producing department for Year 1 and Year 2 using the direct method with actual machine hours and actual power costs.
2. Discuss the following statement: "The costs of power usage increased by 23% for Depart¬
ment A and decreased by over 16% for Department B. Thus, the manager of Department B must be controlling power costs better than the manager of Department A."
3. Can you think of a way to allocate power costs so that a more reasonable and fair as¬
sessment of cost control can be made? Explain.

Transcribed Image Text:

Year 1 Year 2 Machine hours used: Department A 20,000 20,000 Department B 30,000 20,000 Total hours 50,000 40,000 Actual power cost $150,000 $150,000 Budgeted power cost $140,000* $136,000* *$0.40 per machine hour plus $120,000.