Problem 16-37 Name:
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.
Actual Appropriation
Excess
Expenditure
Variable 370,500$ 400,000$ 29,500$
Fixed 1,630,000 1,600,000 (30,000)
Total 2,000,500$ 2,000,000$ (500)$
Did the EDP manager stay within his appropriation? Explain.
b. 3,900
4,000
Was the EDP department effective? Explain.
c.
Efficiency: Actual vs. Planned Output/Input
Variable expenses efficiency:
$370,500
3,900
$400,000
4,000
Actual efficiency
Fixed expenses efficiency:
exceeds
expectations.
Planned input
0.975
Actual output
=
=
$95
Actual input
The department was reasonably effective if the above ratio is a viable surrogate for
effectiveness. However, it is somewhat problematic in this case in that management has
been looking askance at the rapid expansion of EDP department services. Also, this
calculation does not measure the quality of the output.
Planned output
per hour
per hour
=
=
$100
Solution
EDP Department Costs
The EDP manager exceeded his $2,000,000 total appropriation even though he underspent
the variable portion of it. The amount by which the actual expenditure exceeds the
appropriation is sufficiently small that top management is unlikely to view the excess
expenditure as a problem.
=
Actual output
Planned output
=
$1,630,000
3,900
$1,600,000
4,000
Actual efficiency
d. (1)
Actual
Actual Hrs. x
Std. Rate
Hrs. Earned x
Std. Rate
370,500$ 390,000$ 390,000$
(19,500)$
F
$0 N/A
Spending Variance Efficiency Variance
(19,500)$ F
Total Variable EDP Cost Variance
(2)
Actual Budget
Hrs. Earned x
Std. Rate
1,630,000$ 1,600,000$ 1,560,000$
30,000$
U
40,000$ U
Spending Variance Volume Variance
70,000$ U
Total Fixed EDP Cost Variance
e.
Actual output
=
is less than
expectations.
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?
Actual input
Planned output
=
=
$400
per hour
Planned input
=
$418
per hour
f.
Answers will vary.
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.
To do this, normal or anticipated hours of utilization must be specified. In the case at
hand, a first approximation can be found by dividing the current year budgeted fixed costs
by the number of anticipated (budgeted) hours ($1,600,000 ÷ 4,000 = $400 per hour) and
the budgeted variable costs by the budgeted service hours ($400,000 ÷ 4,000 = $100 per
hour). Combining the fixed and variable rate ($400 plus $100), a total of $500 per hour of
computer time is indicated.
It seems reasonable to believe that charging almost $500 per hour for computer time
where there was no charge previously would cause a reduction in demand. A reduction in
demand would cause the fixed portion of EDP department costs to be averaged over fewer
hours, resulting in an even higher charge per hour. For instance, if demand could be
expected to drop by 20 percent to 3,200 hours, then the fixed rate per hour would rise to
$500 ($1,600,000 ÷ 3,200) and the total charging rate would rise to $600 per hour.