The new printing department of Shark Advertising Inc. provides printing services to the other departments. Prior to the establishment of the in-house printing department, the departments contracted with external printers for their printing work. The Shark printing policy is to charge those departments using the printing services variable costs based on the number of pages printed. Fixed costs are recovered in pricing of external jobs. 

The first year’s budget for the printing department was based on the department’s expected total costs divided by the planned number of pages to be printed. 

The annual number of pages to be printed was 420,000 and total variable costs were budgeted to be $420,000. Most government accounts and all internal jobs were expected to use only single-colour printing. Commercial accounts were primarily colour printing. Variable costs were estimated based on the average variable cost of printing a twocolour page that is one-fourth graphics and three-fourths text. The expected annual variable costs for each division were as follows: 

After the first month of operation, the printing department announced that its variable cost estimate of $1 per page was too low. The first month’s actual costs were $50,000 to print 40,000 pages. 

Government accounts 9,000 pages 

Commercial accounts 27,500 pages

Central administration 3,500 pages 

Three reasons were cited for higher-than-expected costs: all departments were using more printing services than planned and government and internal jobs were using more four-colour printing and more graphics than expected. The printing department also argued that additional fourcolour printing equipment would have to be purchased if demand for four-colour printing continued to grow.

 1. Compare the printing department actual results, static budget, and flexible budget for the month just completed. 

2. Discuss possible reasons why the printing department static budget was inaccurate. 

3. An activity-based costing (ABC) study completed by a consultant indicated that printing cost is to be driven by number of pages (@ $0.30 per page) and use of colours (@ $0.25 extra per colour).

1. Discuss the likely effects of using the ABC results for budgeting and control of printing department use. 

2. Discuss the assumptions regarding cost behaviour implied in the ABC study results. 

3. Commercial accounts during the first month (27,500 pages) used four colours per page. Compare the cost of the commercial accounts under the old and the proposed ABC system.

Transcribed Image Text:

Planned Pages Budgeted Variable Cost Department Printed per Page Costs Government $120,000 $1.00 120,000 accounts Commercial 250,000 $1.00 250,000 accounts Central 50,000 $1.00 50,000 administration total $420,000 420,000