Evaluating a Reallocation Method The Daden Company has a service department that provides production departments with power. The budget for the power department was based on its normal anticipated monthly activity of providing power for 17,000 machine-hours at a total cost of $8,500, or $.50 per hour. The consuming departments had the following characteristics:

PRODUCTION DEPARTMENT A B C TOTAL Practical capacity in machine-hours 7,000 10,000 3,000 20,000 Normal activity in machine-hours 6,000 8,500 2,500 17,000 Actual activity in October—
machine-hours actually used 6,000 5,000 2,700 13,700 Standard machine-hours allowed for the output produced in October 5,500 5,000 2,800 13,300 The budget allowance for the production departments was based on the 50-cent rate times the standard machine-hours allowed for the output produced. However, the actual costs incurred by the service department were fully allocated monthly to each production department on the basis of the actual hours consumed by the production departments.
The service department incurred actual costs of $8,220 in October.
. Using the company’s method of cost allocation, prepare a performance report for each production department, showing the amounts budgeted, the actual amounts incurred, and the variances. Use U or F to indicate whether each variance is unfavorable or favorable. Explain the meaning of the variance as reported by dividing each variance into two or more subparts in columnar fashion and commenting on the significance of your variance analysis.
. This information should not be used in answering the previous part. A study of the power costs showed that efficient operation of the service department should result in total costs of $8,900 at a level of 19,000 machine-hours. Using this as well as the previous information, show how you would improve on the way the Daden Company allocates its power costs to its production departments. Give a complete illustration of how the allocations would be made for October, including a presentation of budgeted costs, actual costs, and variances by department. Explain fully why your suggested method is better. lop2