(Appendix 12B)Delta Railroad has two operating divisions-Freight and Passenger.The Maintenance Department serves both divisions.Variable Maintenance Department costs are budgeted at $12 per thousand miles.The fixed Maintenance Department costs are budgeted at $800, 000 per year.The level of the fixed Maintenance Department costs are determined by the peak-period requirements.Data for last year follow: During last year, the Maintenance Department actually incurred $650, 000 in variable costs and $815, 000 in fixed costs. For performance evaluation purposes, how much of the Maintenance Department's actual variable costs should be retained in that department as a spending variance?
A)$74, 000
B)$0
C)$50, 000
D)$60, 000

Question

(Appendix 12B)Delta Railroad has two operating divisions-Freight and Passenger.The Maintenance Department serves both divisions.Variable Maintenance Department costs are budgeted at $12 per thousand miles.The fixed Maintenance Department costs are budgeted at $800, 000 per year.The level of the fixed Maintenance Department costs are determined by the peak-period requirements.Data for last year follow:  During last year, the Maintenance Department actually incurred $650, 000 in variable costs and $815, 000 in fixed costs. For performance evaluation purposes, how much of the Maintenance Department's actual variable costs should be retained in that department as a spending variance?
A)$74, 000 
B)$0 
C)$50, 000 
D)$60, 000

Quizplus · Accepted Answer

The fixed cost is over-budgeted by:

$815,000 - $800,000 = $15,000

Therefore, the variable cost is

$650,000 + $15,000 = $665,000

The standard variable cost is

$12 x 665,000/1000 = $7,980

The variable cost variance is:

$650,000 - $7,980 x 1000 = $72,020

Since the question asks for the amount of actual variable cost that should be retained as a spending variance, we need to subtract the standard variable cost from the actual variable cost:

$72,020 - $7,980 x 1000 = $50,000

Therefore, the correct answer is C) $50,000.

(Appendix 12B)Delta Railroad Has Two Operating Divisions-Freight and Passenger