Top management of Capital Services observed that the budget for the EDP department had been growing far beyond what was anticipated for the past several years. Each year, the EDP manager would demonstrate that increased usage by the company's non-EDP departments would justify a larger appropriation. The administrative vice president commented that she was not surprised because user departments were not charged for the EDP department services and EDP department personnel were creative and eager to continue expanding services. A review of the current year's statistics of the EDP department revealed the following:
Budgetary appropriation $2,000,000, based on 4,000 hours of run time;
$1,600,000 of this appropriation is related to fixed costs
Actual department expenses Variable, $370,500 (incurred for 3,900 hours of run time)
Fixed, $1,630,000
a. Did the EDP manager stay within his appropriation? Show calculations.
b. Was the EDP department effective? Show calculations. Comment.
c. Was the EDP department efficient? Show calculations. (Hint: Treat variable and fixed expenses separately.)
d. Using the formulas for analyzing variable and fixed costs, calculate the variances incurred by the EDP department.
e. Propose a rate per hour to charge user departments for EDP services. Do you think charging users will affect the demand for services by user departments? Why or why not?
f. Discuss whether it would be ethical to evaluate the EDP department manager based only on comparing budgeted versus actual costs and ignoring differences between budgeted and actual volume.