just can\'t understand all the red ink,\" Weston complained to the supervisor of

Question

just can't understand all the red ink," Weston complained to the supervisor of another department. "When the boss called me in, I thought he was going to give me a pat on the back because I know for a fact that my department worked more efficiently last month than it has ever worked before, instead, he tore me apart. I thought for a minute that it might be over the supplies that were stolen out of our warehouse last month. But they only amounted to a couple of hundred dollars, and just look at this report. Everything is unfavorable." Direct labor wages and supplies are variable costs; supervision and depreciation are fixed costs; and maintenance and utilities are mixed costs. The fixed component of the budgeted maintenance cost is $92,000; the fixed component of the budgeted utilities cost is $11,700.  

Evaluate the company's cost control report and explain why the variances were all unfavorable.  
Prepare a performance report that will help Mr. Weston's superiors assess how well costs were controlled in the Machining Department. just can't understand all the red ink," Weston complained to the supervisor of another department. "When the boss called me in, I thought he was going to give me a pat on the back because I know for a fact that my department worked more efficiently last month than it has ever worked before, instead, he tore me apart. I thought for a minute that it might be over the supplies that were stolen out of our warehouse last month. But they only amounted to a couple of hundred dollars, and just look at this report. Everything is unfavorable." Direct labor wages and supplies are variable costs; supervision and depreciation are fixed costs; and maintenance and utilities are mixed costs. The fixed component of the budgeted maintenance cost is $92,000; the fixed component of the budgeted utilities cost is $11,700.  

Evaluate the company's cost control report and explain why the variances were all unfavorable.  
Prepare a performance report that will help Mr. Weston's superiors assess how well costs were controlled in the Machining Department.

Explanation / Answer

Part A)

The variances reported in the cost control report appeared to be unfavorable because the report contained information on the planning budget and actual budget. The actual production was comparatively higher in comparision to what was initially planned. As a result, the actual costs turned out to be significantly higher than the planned cost resulting in favorable variances.

__________

Part B)

We will prepare a performance by including flexible budget and comparing it with planning and actual budget. Flexible budget takes into the actual production level/machine hour and prices as per planning budget. The report will contain information on both activity and spending variances and would thus prove to be more useful.

Performance report is given below:

Notes:

Flexible Budget Calculations:

Direct Labor Wages = 80,500/35,000*38,000 = $87,400

Supplies = 21,000/35,000*38,000 = $22,800

Maintenance = (134,000 - 92,000)/35,000*38,000 [variable portion] = 45,600 + 92,000 [Fixed Portion] = $137,600

Utilities = (15,200 - 11,700)/35,000*38,000 [variable portion] = 3,800 + 11,700 [Fixed Portion] = $15,500

Machining Department Flexible Budget Performance Report Planning Budget Activity Variances Flexible Budget Spending Variances Actual Results 35,000 38,000 38,000 Direct Labor Wages 80,500 6,900 U 87,400 1,300 F 86,100 Supplies 21,000 1,800 U 22,800 300 U 23,100 Maintenance 134,000 3,600 U 137,600 300 F 137,300 Utilities 15,200 300 U 15,500 200 U 15,700 Supervision 38,000 38,000 38,000 Depreciation 80,000 80,000 80,000 Total $368,700 $12,600 U $381,300 $1,100 F $380,200

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