37. LO.5 (Effectiveness/efficiency; ethics) Top management of Bostwick Retail Stores observed that the budget for the EDP department had been growing far beyond what was anticipated for the past several years. Each year, the EDP manager would demonstrate that increased usage by the company?s non-EDP departments would justify the enlarged appropriations. The administrative vice president commented that she was not surprised because user departments were not charged for the EDP department services and EDP department personnel were creative and eager to continue expanding services. A review of the current year?s statistics of the EDP department revealed the following:

Budgetary appropriation $1,000,000, based on 2,000 hours of run time;

$800,000 of this appropriation is related to fixed costs

Actual department expenses Variable, $185,250 (incurred for 1,950 hours of run time)

Fixed, $815,000

a. Did the EDP manager stay within his appropriation? Show calculations.

b. Was the EDP department effective? Show calculations. Comment.

c. Was the EDP department efficient? Show calculations. (Hint: Treat variable and fixed expenses separately.)

d. Using the formulas for analyzing variable and fixed costs, calculate the variances incurred by the EDP department.

e. Propose a rate per hour to charge user departments for EDP services .Do you think charging users will affect the demand for services by user departments? Why or why not?

f. Discuss whether it would be ethical to evaluate the EDP department manager based only on comparing budgeted versus actual costs and ignoring differences between budgeted and actual volume.

Exercise 16-23 Name: Amy Nauman Insert your answers in the gray-shaded cells or select from drop-down list. If an answer is incorrect, the word "wrong" will appear. Rate Variance Payroll for week Regular hours worked x Regular pay rate Overtime hours worked x Overtime pay rate Rate variance Efficiency Variance Payroll for week Actual daytime deliveries x Time alloted per delivery x Regular pay rate After-hours deliveries x Time alloted per delivery x Overtime pay rate Efficiency variance Total Variance $ 120 $16 15 $24 (1,920) (360) $0 $ 105 1 $16 12 1 $24 2,280 n/a 2,280 (1,680) (288) $312 unfav. $312 Problem 16-37 Name: Amy Nauman Insert your answers in the gray-shaded cells or select from drop-down list. Enter formulas where appropriate. If an answer is incorrect, the word "wrong" will appear. a. EDP Department Costs Variable Fixed Total Actual $ 185,250 815,000 $ 1,000,250 Appropriation $ 200,000 800,000 $ 1,000,000 Excess Expenditure $ 14,750 (15,000) $ (250) Did the EDP manager stay within his appropriation? Explain. (Key essay answer here) b. Actual output Planned output = 1,950 2,000 = 0.975 Was the EDP department effective? Explain. (Key essay answer here) c. Efficiency: Actual vs. Planned Output/Input Variable expenses efficiency: Actual output Actual input = $185,250 1,950 = $95 per hour Planned output Planned input = $200,000 2,000 = $100 per hour Actual efficiency Fixed expenses efficiency: exceeds expectations. Actual output Actual input = $815,000 1,950 = $418 per hour Planned output Planned input = $800,000 2,000 = $400 per hour Actual efficiency is less than expectations. d. (1) Actual Hrs. x Std. Rate $ 195,000 Actual $ 185,250 $ Hrs. Earned x Std. Rate $ 195,000 (9,750) F $0 Spending Variance N/A Efficiency Variance $ (9,750) Total Variable EDP Cost Variance (2) Actual $ 815,000 Hrs. Earned x Std. Rate Budget $ 800,000 $ 15,000 U Spending Variance U Volume Variance Total Fixed EDP Cost Variance e. Propose a rate per hour to charge user departments for EDP services. Do you think charging users will affect the demand for services by user departments? Why or why not? (Key essay answer here) f. Discuss whether it would be ethical to evaluate the EDP department manager based only on comparing budgeted versus actual costs and ignoring differences between budgeted and actual volume. (Key essay answer here) you think Why or why not? ger based only ween budgeted