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Critiquing A Cost Report

847 words - 4 pages

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 ...view middle of the document...

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...

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