Frank Western, supervisor of the machining department ofFreemont Company, was visibly upset after being reprimanded for hisdepartment’s poor performance over the prior month. Thedepartment’s performance report is given below:
“I just can’t understand all the red ink,” said Western to SarahMason, supervisor of another department. “When the boss called mein, I thought he was going to give me a pat on the back because Iknow for a fact that my department worked more efficiently lastmonth than it has ever worked before. Instead, he tore me apart. Ithought for a minute that it might be over the supplies that werestolen out of our warehouse last month. But they only amounted to acouple of thousand dollars, and just look at this report.Everything is unfavourable, and I don’t even know why.”
Cost formula(per machine hour)
Actual
Budget
Variance
Machine-Hours
38,000
35,000
Variable overhead costs:
Utilities
0.4
15,700
14,000
1,700
U
Indirect labour
2.30
86,500
80,500
6,000
U
Supplies
06
26,000
21,000
2,900
U
Maintenance
1.2
44,900
42,000
2,900
U
Total variable overhead cost
4.50
173,100
157,500
15,600
Fixed overhead cost:
Supervision
38,000
38,000
Maintenance
92,400
92,000
400
U
Deprecitaion
80,000
80,000
Total fixed overhead cost
210,400
210,000
400
U
Total overhead cost
383,500
367,500
16,000
U
The budget for the machining department had called forproduction of 14,000 units last month, which is equal to a budgetedactivity level of 35,000 machine-hours (at a standard time of 2.5hours per unit). Actual production in the machining department forthe month was 16,000 units.
1. Prepare a new overhead performance report that will helpWestern’s superiors assess efficiency and cost control in themachining department.
2. Would the supplies stolen out of the warehouse be included aspart of the variable overhead spending variance or as part of thevariable overhead efficiency variance for the month? Explain
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