A new printing department provides printing services to the other departments of Farmers &…
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. The projected annual number of pages to be printed was 420,000 and budgeted total variable costs were €420,000. Most government accounts and all internal jobs were expected to use only single-colour printing. Commercial accounts use primarily fourcolour printing. FMIC estimated its variable costs based on the typical mix of single-colour versus four-colour printing and the average variable cost of printing a four-colour 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 using the internal printing department, 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.
Three 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-colour 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-colour printing equipment if demand for four-colour 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 colours (at €1 extra per page for colour).
(a) Discuss the likely effects of using the ABC results for budgeting and control of printing department use.
(b) Discuss the assumptions regarding cost behaviour implied in the ABC study results.
(c) All commercial accounts during the first month (27,500 pages) used four colours per page. Compare the cost of commercial accounts under the old and the proposed ABC system.