Reference no: EM132590818

Bulldog Inc. is a large manufacturing company that runs its own electric power plant from the excess steam produced in its manufacturing process. Power is provided to two production departments - Department A and Department B. The capacity of the power plant was originally determined by the expected peak demands of the two production departments. The expected average usage and peak demands are, respectively, 60 percent and 66,000,000 kWh (kilowatthours) for Department A and 40 percent and 44,000,000 kWh for Department B.

The budgeted monthly costs of producing power, based on normal usage of 100,000,000 kWh, are $30,500,000 in fixed costs and $8,000,000 in variable costs. For November, the actual kilowatt-hours used was 60,000,000 by Department A and 20,000,000 by Department B. Actual costs were $30,500,000 and actual variable costs were $8,000,000. Terry Lamb, the controller, prepared the following monthly report:

Bulldog Inc. Monthly Allocation Report November 2015 Power plant usage 80,000,000 kWh

Actual Costs:

Fixed $ 30,500,000

Variable $ 8,000,000

Total Costs $ 38,500,000

Rate per kilowatt-hour $ 0.48125

Allocations: Department A $ 28,875,000

Department B $ 9,625,000

Total Allocated $ 38,500,000

Lamb fully allocated all power plant costs on the basis of actual kilowatt-hors used by each production department. This report will be submitted to the production department operating managers.

Question 1. Discuss at least two problems with the monthly allocation report prepared by Lamb for November 2015 at Bulldog Inc.

Question 2.a revised monthly allocation report for November 2015 using a flexible-budget approach.

Question 3. Discuss the behavioral implications of Lamb's monthly allocation report for November 2015 on the production managers of Department B at Bulldog Inc.