Cost allocation, monthly reports (CMA, revised). Bulldog Inc. is a large manufacturing company that runs its own electrical power plant from the excess steam produced in its man¬

ufacturing process. Power is provided to two production departments—Department A and Department B. The capacity of the power plant was originally determined by the expected peak demands of the two production departments. The expected average usage and peak demands are, respectively, 60 percent and 66,000,000 kilowatt hours (kwh) for Department A and 40 percent and 44,000,000 kwh for Department B.

The budgeted monthly costs of producing power, based on normal usage of 100,000,000 kwh, are $30,500,000 in fixed costs and $8,000,000 in variable costs. For November, the actual kwh used was 60,000,000 by Department A and 20,000,000 by Department B. Actual fixed costs were $30,500,000, and actual variable costs were

$8,000,000.

Terry Lamb, the controller, prepared the following monthly report:

Bulldog Inc.

Monthly Allocation Report November 2007 Power plant usage Actual costs:

80,000,000 Fixed $30,500,000 Variable 8,000,000 Total $38,500,000 Rate per kwh Allocations:

($38,500,000 * 80,000,000 kwh) $ 0.48125 To Department A (60,000,000 kwh X $0.48125) $28,875,000 To Department B (20,000,000 kwh X $0.48125) 9,625,000 Total allocated $38,500,000 Lamb fully allocated all power plant costs on the basis of actual kwh used by each pro¬

duction department. This report will be submitted to the two production department operating managers.

Required 1. Discuss at least two problems with the monthly allocation report prepared by Lamb for November 2007 at Bulldog Lac.
2. Prepare a revised monthly allocation report for November 2006 using a flexible budget approach.
3. Discuss the behavioural implications of Lamb’s monthly allocation report for November 2007 on the production managers of Department B at Bulldog Inc.