Critiquing_a_Cost_Report

Critiquing a Cost Report Complete the following exercise: Frank Weston, supervisor of the Freemont Corporation's Machining Department, was visibly upset after being reprimanded for his department's poor performance over the prior month. The department's cost control report is given below: "I 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. Freemont Corporation-Machining Department | Cost Control Report | For the Month Ended June 30 |   | Planning Budget | Actual Results | Variances |   | Machine-hours | 35,000 | 38,000 |   |   |   |   |   |   |   | Direct labor wages | $80,500 | $86,100 | $5,600 | U | Supplies | 21,000 | 23,100 | 2,100 | U | Maintenance | 134,000 | 137,300 | 3,300 | U | | | | 500 | U | Utilities | 15,200 | 15,700 | 0 |   | Supervision | 38,000 | 38,000 | 0 |   | Depreciation | 80,000 | 80,000 |   |   | Total | $368,700 | $380,200 | | | | | | | | 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. Direct labor wages show an unfavorable variance of $5,600 because the budget called for wages and salaries of $80,500, the actual wages and salaries expense was $86,100. The problem with the report is that it compares revenues and costs at one level of activity (35,000 Machine-hours) to costs at a different level of activity (38,000 Machine-hours). The firm used 3,000 more machine hours than they originally budgeted, which caused the variances to be unfavorable. Additionally, with the increase in Machine-hours, variable costs for direct labor wages, supplies, maintenance, and utilities increased accordingly. Actual Machine hours = 38,000 The company used 38,000 machine-hours Total Actual Fixed Costs total $221,700 Total Actual Variable Costs _Direct labor wages..................$86,100 _Supplies………….....................$23,100 _Variable maintenance………....$45,300 _Variable utilities……………....$4,000………..$158,500 Total Actual Variable Costs $158,500/ Actual Machine hours 38,000 = $4.17 Budgeted Machine hours = 35,000 The company budget was 35,000 machine-hours Total Budgeted Fixed Costs total $221,700 Total Budgeted Variable Costs _Direct labor wages..................$80,500 _Supplies………….....................$21,000 _Variable maintenance………....$42,000 _Variable utilities……………....$3,500………..$147,000 Total Budgeted Variable Costs $147,000/ Actual Machine hours 35,000 = $4.20 Actual Rate – Budgeted Rate 4.17 – 4.20 = -0.03 The company saved $0.03 per hour The increase in costs is favorable because actual per machine hour rate is less than the budgeted per machine-hour rate, the firm saved approximately $0.03 per machine-hour. Management should expect some costs to be higher as a result of more business. Freemont Corporation-Machining Department | Cost Control Report | For the Month Ended June 30 |   | Planning Budget | Actual Results | ActivityVariances | | Machine-hours | 35,000 | 38,000 |   | |   |   |   |   | | Rate per machine-hour | $4.20 | $4.17 | $0.03 | F | Direct labor wages | $80,500 | $86,100 | $5,600 | U | Supplies | 21,000 | 23,100 | 2,100 | U | Maintenance Fixed | 92,000 | 92,000 | 0 | | Maintenance Variable | 42,000 | 45,300 | 3,300 | U | Utilities Fixed | 11,700 | 11,700 | 0 | | Utilities Variable | 3,500 | 4,000 | 500 | U | Supervision | 38,000 | 38,000 | 0 |   | Depreciation | 80,000 | 80,000 | 0 |   | Total | $368,700 | $380,200 |   $11,500 | F | If Freemont Corporation-Machining Department include both fixed and variable cost they are saving more money. Actual Total $380,200/38,000 = $10.01 Budgeted Total $368,700/35,000 = $10.53 Actual Rate – Budgeted Rate 10.01 – 10.53 = -0.52 The company saved $0.52 per machine-hour which is favorable to the firm. Freemont Corporation-Machining Department | Cost Control Report | For the Month Ended June 30 |   | Planning Budget | Actual Results | ActivityVariances | | Machine-hours | 35,000 | 38,000 |   | |   |   |   |   | | Rate per machine-hour | $10.53 | $10.01 | $0.52 | F | Direct labor wages | $80,500 | $86,100 | $5,600 | U | Supplies | 21,000 | 23,100 | 2,100 | U | Maintenance Fixed | 92,000 | 92,000 | 0 | | Maintenance Variable | 42,000 | 45,300 | 3,300 | U | Utilities Fixed | 11,700 | 11,700 | 0 | | Utilities Variable | 3,500 | 4,000 | 500 | U | Supervision | 38,000 | 38,000 | 0 |   | Depreciation | 80,000 | 80,000 | 0 |   | Total | $368,700 | $380,200 |   $11,500 | F |