A new printing department provides printing services to the other departments of Farmers & Mechanics Insurance Company (FMIC). Before the establishment of the in-house printing department, the departments contracted with external printers for their printing work. FMIC’s printing policy is to charge departments for the variable printing costs on the basis of number of pages printed. The company recovers fixed costs 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.
Most external government accounts and all internal jobs were expected to use only single-color printing. External commercial accounts use primarily four-color printing. FMIC estimated its variable costs based on the typical mix of single-color versus four-color printing and the average variable cost of printing a four-color page that is one-fourth graphics and three-fourths text. The expected annual costs for each division were as follows:

After the first month of operations, the printing department announced that its variable cost estimate of $1 per page was too low. The first month’s actual costs were $51,000 to print 40,000 pages.
Government accounts . 9,000 pages
Commercial accounts ... 27,500
Central administration ... 3,500

Two 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-color printing and more graphics than anticipated in the original variable cost projections. The printing department also argued that it would have to purchase additional four-color printing equipment if demand for four-color 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 ABC study completed by a consultant indicated that printing costs are driven by number of pages (at $.35 per page), and use of colors (at $1 extra per page for color).
a. Discuss the likely effects of using the ABC results for budgeting and control of printing department use.
b. Discuss the assumptions regarding cost behavior implied in the ABC study results.
c. All commercial accounts during the first month (27,500 pages) used four colors per page.
Compare the cost of commercial accounts under the old and the proposed ABCsystem.

  • CreatedNovember 19, 2014
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