The Huxtable Corporation, whose budget year-end is June 30, recently suffered a partial shutdown of operations. An investigation of the situation revealed the following chain of events:
June 1-C. Valquez, the manager of the Fabricating Department, submitted a purchase requisition for 10,000 units of Part 88 at an expected cost of $18 per unit. The requisition was received three weeks prior to the expected usage data (company policy requires that all materials not kept in inventory be ordered at least two weeks in advance). H. Winston, the manager of the Purchasing Department, immediately placed a purchase order with the Albright Corporation for the units at the budget price. Albright Corporation promised delivery of the units ordered within 10 days. Although Winston had never used Albright Corporation as a supplier before, it was the only supplier offering the units at the budgeted price.
Required:
(1) Evaluate the company's methods of allocating the following costs, including your recommendations and justifications for any alternative allocations:
(a) The $6,000 cost of idle time in the Assembly Department.
(b) The $1,000 savings in costs due to layoffs in the Machining Department.
(c) The $1,500 cost of training in the Machining Department.
(d) The $20,000 lost profit on sales resulting from Assembly Department downtime.
(2) Evaluate the company's overall approach to the use of budgets and justify any recommended changes.