Question & Answer: Bob fully allocated all power plant costs on the basis of actual kilowatt-hours used by each production department. This re…..

ABC Inc. is a large manufacturing company that runs its own electrical power plant from the excess steam produced in its manufacturing 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 kWh (kilowatt-hours) 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 kilowatt-hours 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.

Bob Smith, the controller, prepared the following monthly report:

Bob fully allocated all power plant costs on the basis of actual kilowatt-hours used by each production 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 Bob for November 2017 at ABC Inc. (8 marks)

2) Prepare a revised monthly allocation report for November 2017 using a flexible-budget approach. (12 marks)