Professional Documents
Culture Documents
DISCUSSION QUESTIONS
17-1
17-2
Chapter 17
Chapter 17
17-3
17-4
Chapter 17
Chapter 17
17-5
EXERCISES
E17-1
(1)
$ 7,500
127,500
$135,000
The actual Maintenance Department cost for November, $132,000 would be charged
directly to that department. The $9 charging rate is used to charge other departments
for Maintenance Department service received. The November charges would be
$126,000 (14,000 actual maintenance hours $9 charging rate).
The same approach would be followed for General Factory cost, except that transfers
and charges for such costs would be made to producing departments only. The rate
would be determined as follows:
Fixed cost......................................................................
Variable cost (1,000 $20)...........................................
Total General Factory cost .........................................
$30,000
20,000
$50,000
$50,000
= $50 per employee
1,000 employees
The actual cost charged to the General Factory in November would be $51,000, and
General Factory cost charged to producing departments would be $49,000 (980 actual
employees $50 charging rate).
17-6
Chapter 17
E17-1 (Concluded)
(2)
Maintenance Dept.
General
Actual cost .........................
$132,000
Budget allowance:
Variable cost:
14,000 hours $8.50..... $119,000
980 employees $20 ....
$19,600
Fixed cost ......................
7,500
126,500
30,000
Spending variance ..............
$ 5,500 unfav.
Budget allowance................
$126,500
Cost charged out:
14,000 hours $9..........
126,000
980 employees $50 ....
Idle capacity variance .........
$
500 unfav.
Total variance ...............
$ 6,000 unfav.
Factory
$51,000
49,600
$ 1,400 unfav.
$49,600
49,000
$ 600 unfav.
$ 2,000 unfav.
E17-2
(1)
(2)
$20,000
2,000 hrs.
Electricians:
$30,000
2,500 hrs.
Department
1
2
3
$ 4,000 $ 8,000 $ 4,500
12,000
10,200
6,600
$16,000 $18,200 $11,100
Total
$16,500
28,800
$45,300
Chapter 17
17-7
E17-2 (Concluded)
(3)
Monthly
Budget
$20,000
30,000
Fixed Cost
Percentage
70%
80
Carpenter Shop
$19,800
$ 4,950
14,000
18,950
$ 850 unfav.
$18,950
16,500
$ 2,450 unfav.
Fixed
Cost
$14,000
24,000
Actual cost..................
Budget allowance:
Variable cost (2,400
hrs. $2.40) .......
Fixed cost ...............
Spending variance .....
Budget allowance.......
Cost charged to
producing departments (req. 2)......
Idle capacity variance
Variable
Rate
Per Hour
$3.00
2.40
Variable
Cost
$6,000
6,000
Electricians
$28,900
$ 5,760
24,000
29,760
$ (860) fav.
$29,760
28,800
$ 960 unfav.
E17-3
(1)
The billing rate for the Maintenance Department was based on the number of
maintenance hours worked, because it was the only variable given on which a
measure of operating results could be computed. For the Payroll Department,
the billing rate was based on the number of employees, because it was an adequate measure of operating results for that department.
17-8
Chapter 17
E17-3 (Concluded)
(2)
Maintenance Department:
Actual cost......................................................
Budget allowance based on actual hours:
Variable cost (3,355 hours $10) .............
Fixed cost ..................................................
Spending variance .........................................
$47,200
$33,550
12,800
46,350
$850 unfav.
$46,350
46,970
$ (620) fav.
Payroll Department:
Actual cost......................................................
Budget allowance based on actual number
of employees:
Variable cost (1,165 employees $2)...
Fixed cost ..............................................
Spending variance ........................................
$13,875
$ 2,330
12,000
14,330
$ (455) fav.
$14,330
13,980
$ 350 unfav.
E17-4
(1)
Producing
Departments
Hours
10,000
20,000
12,000
8,000
50,000
A
$1,200
1,600
$2,800
%
Fixed cost
20%
$1,200
40
2,400
24
1,440
16
960
100%
Service
Departments
B
$2,400
2,600
$5,000
**A
B
X
Y
X
$1,440
1,400
$2,840
=
=
=
=
Y
$ 960
1,200
$2,160
Total
$ 6,000
6,800
$12,800
8,000 hrs.
13,000
7,000
6,000
34,000 hrs.
$6,000
$6,800
34,000 hrs.
Chapter 17
17-9
E17-4 (Concluded)
(2)
The two general principles for the allocation of service department costs applicable under the circumstances are (a) distribution on the basis of service or benefit received for the variable cost; and (b) distribution on the basis of readiness
to serve or capacity that must be maintained for the fixed cost.
This solution distributes all variable costs incurred. A predetermined variable cost rate should be calculated, so that the efficiency of the power plant
could be judged. The present $.20 rate is based on the actual monthly consumption and cost.
E17-5
(1)
Benefiting
Standby
Department
Capacity
Cutting .............................................
35,000
Grinding ...........................................
26,000
Polishing ..........................................
30,000
Stores................................................
9,000
Total................................................... 100,000
Variable rate =
=
=
% of
Total
35%
26
30
9
100%
Quarterly
Fixed Cost
Billing
$2,450
1,820
2,100
630
$7,000
17-10
Chapter 17
E17-5 (Concluded)
Benefiting Department
Cutting
First Quarter Billing:
Variable rate .............. $
.10
Actual consumption.. 29,500
Variable cost ............. $ 2,950
Fixed cost..................
2,450
Total........................... $ 5,400
Grinding
Polishing
Stores
Total
.10
20,000
$ 2,000
1,820
$ 3,820
.10
29,000
$ 2,900
2,100
$ 5,000
.10
6,500
$ 650
630
$ 1,280
.10
85,000
$ 8,500
7,000
$ 15,500
.10
24,750
$ 2,475
1,820
$ 4,295
.10
23,500
$ 2,350
2,100
$ 4,450
.10
8,250
$ 825
630
$ 1,455
.10
90,000
$ 9,000
7,000
$ 16,000
.10
21,250
$ 2,125
1,820
$ 3,945
.10
25,500
$ 2,550
2,100
$ 4,650
.10
6,500
$ 650
630
$ 1,280
.10
86,000
$ 8,600
7,000
$ 15,600
.10
23,000
$ 2,300
1,820
$ 4,120
$16,180
.10
27,750
$ 2,775
2,100
$ 4,875
$18,975
.10
6,000
$ 600
630
$ 1,230
$ 5,245
First
Quarter
Actual cost.................... $15,450
Less budget allowance:
Variable rate .............. $
.10
Actual KWH provided 85,000
Variable cost ............. $ 8,500
Fixed cost..................
7,000
Budget allowance..... $15,500
Spending variance ....... $ (50)
Second
Quarter
$16,200
Third
Quarter
$15,900
Fourth
Annual
Quarter
Total
$15,400 $ 62,950
.10
90,000
$ 9,000
7,000
$16,000
$ 200
.10
86,000
$ 8,600
7,000
$15,600
$ 300
.10
85,000
$ 8,500
7,000
$15,500
$ (100)
.10
346,000
$ 34,600
28,000
$ 62,600
$
350
fav.
unfav.
unfav.
fav.
unfav.
.10
33,500
$ 3,350
2,450
$ 5,800
.10
85,000
$ 8,500
7,000
$ 15,500
$ 62,600
(2)
Chapter 17
E17-6
17-11
Gasoline ........................................................
Oil, minor repairs, parts, and supplies.......
Outside repairs .............................................
Insurance .....................................................
Salaries and benefits ...................................
Depreciation..................................................
Total............................................................
Monthly
Budget
$ 5,513
378
236
525
2,500
2,310
$11,462
March
Actual
$ 5,323
380
50
525
2,500
2,310
$11,088
21
63,000
$.1819
21
63,000
$.1760
(Over)
Under
$190
(2)
186
$374
$.0059
63,000 miles
16 miles per gal.
Outside repairs:
Insurance:
No change
$30,000 annual cost
12 months
Depreciation:
= $236.25
17-12
Chapter 17
E17-7
CLAYTON COMPANY
Assembly Department
Flexible Budget90% Level
Direct materials (90% $20,000) .......................................................
Direct labor (90% $11,250) ...............................................................
Supervision .........................................................................................
Indirect materials ($250 + (90% ($1,750 $250))) ..........................
Property tax .........................................................................................
Maintenance ($600 + (90% ($1,600 $600))) ..................................
Power ($200 + (90% ($300 $200))) ................................................
Insurance .............................................................................................
Depreciation .........................................................................................
Total ............................................................................................
$18,000
10,125
500
1,600
300
1,500
290
175
1,600
$34,090
Chapter 17
E17-8
17-13
Operating level
Based on labor hours .......................
Percentage of capacity .....................
800
80%
900
90%
Variable cost:
Indirect labor ..................................... $ 1,200.00 $ 1,350.00 $
Factory supplies ................................ 1,880.00
2,115.00
Power ................................................
600.00
675.00
Rework operations ............................
400.00
450.00
Payroll taxes ...................................... 1,040.00
1,170.00
Repair and maintenance ...................
320.00
360.00
General factory ..................................
160.00
180.00
Total variable cost ................ $ 5,600.00 $ 6,300.00 $
1,000
100%
1,100
110%
1,500.00
2,350.00
750.00
500.00
1,300.00
400.00
200.00
7,000.00
$ 1,650.00
2,585.00
825.00
550.00
1,430.00
440.00
220.00
$ 7,700.00
Fixed Cost:
Indirect labor...................................... $ 4,000.00 $ 4,000.00 $ 4,000.00
Supervision ....................................... 2,500.00
2,500.00
2,500.00
Factory supplies ................................
900.00
900.00
900.00
Power .................................................
500.00
500.00
500.00
Rework operations ............................
200.00
200.00
200.00
Payroll taxes ......................................
800.00
800.00
800.00
Repair and maintenance ...................
600.00
600.00
600.00
Property insurance............................
700.00
700.00
700.00
Property taxes....................................
300.00
300.00
300.00
Vacation pay....................................... 2,200.00
2,200.00
2,200.00
Employee pension costs ................. 1,200.00
1,200.00
1,200.00
Employee health plan........................ 1,800.00
1,800.00
1,800.00
Machinery depreciation ................... 1,000.00
1,000.00
1,000.00
Water and heat...................................
600.00
600.00
600.00
Building occupancy .......................... 1,000.00
1,000.00
1,000.00
General factory .................................. 1,500.00
1,500.00
1,500.00
Total fixed cost...................... $19,800.00 $19,800.00 $19,800.00
Total cost ........................................... $25,400.00 $26,100.00 $26,800.00
$ 4,000.00
2,500.00
900.00
500.00
200.00
800.00
600.00
700.00
300.00
2,200.00
1,200.00
1,800.00
1,000.00
600.00
1,000.00
1,500.00
$19,800.00
$27,500.00
17-14
Chapter 17
E17-9
Spending
Actual Variance
Cost Unfav.(Fav.)
8,800
Original Budget
Budget Allowance
8,000
8,800
$ 2,000
800
4,000
1,200
400
$ 8,400
$ 2,200
880
4,400
1,320
440
$ 9,240
$ 2,300
900
4,300
1,400
500
$ 9,400
$800
2,400
400
$ 3,600
$12,000
$800
2,400
400
$ 3,600
$12,840
$840
2,400
420
$ 3,660
$13,060
13,200
$(360) fav.
$13,060
13,200
$ (140)
$
$
220 unfav.
(360) fav.
(140)
$100
20
(100)
80
60
40
0
20
$220
unfav.
Chapter 17
17-15
E17-10
Original Budget
Budget Allowance
10,000
9,600
Spending
Actual Variance
Cost Unfav.(Fav.)
9,600
$ 70,000
61,500
27,000
12,000
6,000
1,500
10,000
21,000
9,000
$218,000
$ 67,200
59,040
25,920
11,520
5,760
1,440
9,600
20,160
8,640
$209,280
$ 70,000
60,000
28,000
12,000
6,100
1,500
10,000
15,000
9,000
$211,600
$2,800
960
2,080
480
340
60
400
(5,160)
360
$ 48,000
36,000
40,000
8,000
12,000
19,000
15,000
9,000
5,000
23,000
50,000
15,000
12,000
15,000
$307,000
$525,000
$ 48,000
36,000
40,000
8,000
12,000
19,000
15,000
9,000
5,000
23,000
50,000
15,000
12,000
15,000
$307,000
$516,280
$ 48,000
36,000
40,500
8,000
12,250
19,000
15,000
9,000
5,000
23,000
50,000
15,000
13,000
15,250
$309,000
$520,600
0
0
500
0
250
0
0
0
0
0
0
0
1,000
250
504,000
$ 12,280 unfav.
$520,600
504,000
$ 16,600
Spending variance...............................................
Idle capacity variance ........................................
Underapplied factory overhead..........................
$4,320 unfav.
12,280 unfav.
$ 16,600
$4,320
unfav.
17-16
Chapter 17
PROBLEMS
P17-1
(1)
Factory overhead applied for each producing department:
Dept. A: 20,480 hrs.
$4.20 = $86,016
Dept. B: 29,850 hrs.
3.10 = 92,535
Dept. C: 20,100 hrs.
3.75 = 75,375
(2)
Expenses
Actual department factory
overhead ...........................
Proration of service departments:
Utilities (on actual kwh) ....
Repairs and maintenance
(on actual dlh) ...............
Total actual department factory
overhead ...........................
Applied factory overhead .............
(Over-) or underapplied factory
overhead ...........................
* 39,300 $.35
** 20,480 $.90
(3)
=
=
$56,020
$52,850
$42,580
13,755*
16,170
12,530
18,432**
26,865
18,090
$88,207
86,016
$95,885
92,535
$73,200
75,375
$ 2,191 unfav.
$ 3,350 unfav.
$ (2,175)fav.
$13,755
18,432
Repairs and
Maintenance
Utilities
$56,320
$50,040
6,633
$62,953
63,387
49,088
$(434) fav.
$952 unfav.
Chapter 17
17-17
P17-2
(1)
Maintenance Department:
= $10,500
3,500
Utilities Department:
Total estimated cost
Total estimated kwh
$8,400
70,000
(2)
Producing
Planers
Variable overhead.........................................
Fixed overhead ............................................
Direct departmental overhead ....................
Distributionservice depts.:
Maintenance:
(2,500 $3) .....................................
(1,000 $3) .....................................
$15,000
18,000
$33,000
Service
Radial
Drills
Maintenance
Utilities
$ 9,000
15,000
$24,000
$ 4,500
6,000
$10,500
$3,600
4,800
$8,400
3,000
(10,500)
7,500
Utilities:
(45,000 $.12) ................................
(25,000 $.12) ...............................
5,400
$45,900
$30,000
12,000
$ 3.825
3,000
7,500
4
(8,400)
17-18
Chapter 17
P17-2 (Continued)
(3)
Spending variance:
Actual factory overhead
Add distribution
service departments*
Total departmental factory
overhead
Budget allowance based
on actual hours:
Variable:**
Planers (1,020
$2.325) .............. $2,371.50
Radial Drills
(680 $2) ........
Fixed ........................ 1,500.00
Spending variance...........
Planers
Radial Drills
$3,120.00
$2,300
1,440.00
480
$4,560.00
$2,780
3,871.50
$ 688.50 unfav.
$1,360
1,250
2,610
$ 170 unfav.
Radial
Drills
$960
$ 240
480
$1,440
240
$ 480
Radial
Drills
$2,610
2,720
$ (110) fav.
Chapter 17
17-19
P17-2 (Continued)
(4)
Maintenance
Actual service department cost .........................
$1,170
Distributed to producing departments:
Maintenance (400 hrs. $3) ..........................
1,200
Utilities (6,000 kwh $.12)..............................
Overdistributed ...................................................
$(30)
Spending variance:
Actual service department cost ................
Budget allowance
based on actual hours:
Variable .....................
Fixed .........................
Spending variance.......
$514.281
500.00
variable expense
Estimated hours
variable expense
Estimated kwh
720
$ (10)
$1,170.00
$710.00
$308.402
1,014.28
400.00
$ 155.72 unfav.
708.40
$ 1.60 unfav.
$1,014.28
$708.40
1,200.00
$ (185.72) fav.
$ (30.00) fav.
720.00
$ (11.60) fav.
$ (10.00) fav.
$4,500
3,500
$3,600
70,000
Utilities
$710
17-20
Chapter 17
17-2 (Concluded)
(5)
Reconciliation of total variances:
Actual factory overhead .......................
Less: Applied to work in process
Planers ..................................
Applied to work in process
Radial Drills............................
Net total variance ..................................
Variances:
Spending variancePlaners............
Spending varianceRadial Drills....
Idle capacity variancePlaners ......
Idle capacity variance
Radial Drills.................................
Spending varianceMaintenance ...
Spending varianceUtilities............
Idle capacity varianceMaintenance
Idle capacity varianceUtilities ......
$7,300.00
$3,901.50
2,720.00
Unfavorable
$ 688.50
170.00
Favorable
30.00
110.00
155.72
1.60
$1,015.82
Net total variance
6,621.50
$ 678.50 unfav.
$678.50 unfav.
185.72
11.60
$ 337.32
Chapter 17
17-21
P17-3
(1)
Machining
Assembly
$2,250
$1,900.00
1,460
2,852.50
625
500.00
165
$4,500
247.50
$5,500.00
1Machining:
Machining
$2,412
Assembly
$1,957.00
1,460
2,852.50
670
515.00
165
$4,707
247.50
$5,572.00
17-22
Chapter 17
17-3 (Continued)
The budget allowances calculated in (a) and in (b) include the service department shares by two different methods: the share of the Maintenance Department
cost is based on the charging rate of $.50 and the actual hours worked, which is
in harmony with the general procedure advocated. The share of the Janitorial
Department cost is based on 1/12 of the apportioned cost. This approach is used
because it is believed that janitorial services have no relationship to the number
of hours worked in the production departments. In fact, the illustration could be
made more realistic by basing the apportionment of Janitorial Department cost
on the basis of the relative amount of floor space occupied by the producing
departments. As long as no change in the space has been reported, the share
would remain as established in the budget figures.
It should be noted further that the maintenance cost could be charged to the
producing departments on the basis of maintenance hours and not direct labor
hours. An additional refinement would apportion fixed cost on the basis of a predetermined maintenance schedule, and the variable cost on the basis of maintenance hours actually used.
(2)
Spending and idle capacity variances for each producing department, based on
actual production hours:
Machining
Assembly
$4,200
$5,240.00
670
165
$5,035
515.00
247.50
$6,002.50
4,707
$ 328 unfav.
5,572.00
$ 430.50 unfav.
$4,707
$5,572.00
4,824
$ (117) fav.
5,665.00
$ (93.00)fav.
Chapter 17
17-23
P17-3 (Concluded)
(3)
Spending variance for each service department:
Maintenance
$1,350.00
1,147.93
$ 202.07 unfav.
$ 447.93
$ 225
700.00
600
Budget allowance..................................
P17-4
Capacity .....................................................
Direct labor hours.....................................
Variable costs: .........................................
Indirect labor......................................
Payroll taxes and fringe benefits .....
Power and light ..................................
Inspection...........................................
Other semivariable costs..................
Total variable costs ..........................
Fixed costs:
Depreciation ......................................
Insurance ...........................................
Maintenance cost ..............................
Property tax........................................
Supervisory staff ..............................
Power and light .................................
Inspection...........................................
Other semivariable costs..................
Total fixed costs ...............................
Total factory overhead ............................
Janitorial
$1,040
825
$ 215 unfav.
$1,147.93
$ 825
80%
40,000
$ 4,000
18,000
57,240
1,200
4,800
6,000
$ 91,240
90%
45,000
$ 4,500
20,250
64,395
1,350
5,400
6,750
$102,645
100%
50,000
$ 5,000
22,500
71,5501
1,5002
6,0003
7,5004
$114,050
9,000
1,500
24,000
1,500
36,000
200
4,200
1,400
$ 77,800
$169,040
9,000
1,500
24,000
1,500
36,000
200
4,200
1,400
$ 77,800
$180,445
9,000
1,500
24,000
1,500
36,000
200
4,200
1,400
$ 77,800
$191,850
17-24
Chapter 17
17-4 (Concluded)
1Payroll
2 Power
and light:
High ............................................................
Low .............................................................
Difference....................................................
Hours
50,000
40,000
10,000
$300
= $.03 per direct labor hour
10,000 hrs.
Total cost ....................................................
Variable cost (50,000 hrs. $.03)..............
Fixed cost ...................................................
Cost
$ 1,700
1,400
$ 300
$ 1,700
1,500
$ 200
3 Inspection:
High .............................................................
Low .............................................................
Difference....................................................
Hours
50,000
40,000
10,000
$1,200
= $.12 per direct labor hour
10,000 hrs.
Total cost ....................................................
Variable cost (50,000 hrs. $.12)..............
Fixed cost ...................................................
4 Other
Cost
$10,200
9,000
$ 1,200
$10,200
6,000
$ 4,200
semivariable expenses:
High ............................................................
Low .............................................................
Difference....................................................
$1,500
= $.15 per direct labor hour
10,000 hrs.
Total cost ....................................................
Variable cost (50,000 hrs. $.15)..............
Fixed cost ...................................................
Hours
50,000
40,000
10,000
Cost
$ 8,900
7,400
$ 1,500
$ 8,900
7,500
$ 1,400
Chapter 17
17-25
P17-5
(1)
Operating level
Based on machine hours ................
Percentage of capacity ...................
Variable cost:
Indirect labor ....................................
Factory supplies ..............................
Power ..............................................
Rework operations...........................
Payroll taxes ....................................
Repair and maintenance .................
General factory ...............................
Total variable cost ...............
Fixed cost:
Indirect labor ..................................
Supervision .....................................
Factory supplies ..............................
Power ..............................................
Payroll taxes .....................................
Repair and maintenance ................
Property insurance ..........................
Property taxes..................................
Vacation pay .....................................
Employee pension costs.................
Employee health plan......................
Machinery depreciation .................
Water and heat .................................
Building occupancy.........................
General factory ................................
Total fixed cost ...................
Total cost .........................................
1,600
80%
1,800
90%
$ 3,440.00 $ 3,870.00 $
1,200.00
1,350.00
800.00
900.00
480.00
540.00
560.00
630.00
400.00
450.00
320.00
360.00
$ 7,200.00 $ 8,100.00 $
2,000
100%
2,200
110%
4,300.00
1,500.00
1,000.00
600.00
700.00
500.00
400.00
9,000.00
$ 4,730.00
1,650.00
1,100.00
660.00
770.00
550.00
440.00
$ 9,900.00
$ 2,000.00
2,000.00
600.00
450.00
1,000.00
1,400.00
750.00
500.00
1,700.00
1,000.00
800.00
3,500.00
400.00
900.00
1,000.00
$18,000.00
$27,900.00
17-26
Chapter 17
P17-5 (Concluded)
(2)
FABRICATION DEPARTMENT
Variance Report
For the Month of February, 20
Budget
Allowance
Normal
Capacity
1,800
90%
Budget
Allowance
Actual
Capacity
1,860
93%
$ 3,870.00
1,350.00
900.00
540.00
630.00
450.00
360.00
$ 8,100.00
$ 3,999.00
1,395.00
930.00
558.00
651.00
465.00
372.00
$ 8,370.00
$ 4,125.00
1,554.00
970.50
1,088.25
675.50
125.75
385.00
$ 8,924.00
$126.00
159.00
40.50
530.25
24.50
(339.25)
13.00
$ 2,000.00
2,000.00
600.00
450.00
1,000.00
1,400.00
750.00
500.00
1,700.00
1,000.00
800.00
3,500.00
400.00
900.00
1,000.00
$ 2,000.00
2,000.00
600.00
450.00
1,000.00
1,400.00
750.00
500.00
1,700.00
1,000.00
800.00
3,500.00
400.00
900.00
1,000.00
$ 2,000.00
2,000.00
600.00
450.00
1,000.00
1,400.00
785.00
490.00
1,700.00
1,000.00
845.00
3,500.00
465.00
900.00
1,000.00
0.00
0.00
0.00
0.00
0.00
0.00
35.00
(10.00)
0.00
0.00
45.00
0.00
65.00
0.00
0.00
$18,000.00
$26,100.00
$18,000.00
$26,370.00
$18,135.00
$27,059.00
Actual
Cost
26,970.00
$ (600.00) fav.
$27,059.00
26,970.00
Spending
Variance
unfav.
(fav.)
$689.00
unfav.
89.00
689.00 unfav.
(600.00) fav.
89.00
Chapter 17
17-27
P17-6
(1)
Operating level
Based on direct labor hours.........................
Percentage of capacity ................................
1,200
80%
1,350
90%
1,500
100%
1,650
110%
Variable cost:
Indirect labor..................................................
Factory supplies ............................................
Power ..............................................................
Rework operations ........................................
Payroll taxes ..................................................
Repair and maintenance ...............................
General factory .............................................
$ 2,700.00
1,440.00
420.00
600.00
420.00
180.00
240.00
$ 3,037.50
1,620.00
472.50
675.00
472.50
202.50
270.00
$ 3,375.00
1,800.00
525.00
750.00
525.00
225.00
300.00
$ 3,712.50
1,980.00
577.50
825.00
577.50
247.50
330.00
$ 6,000.00
$ 6,750.00
$ 7,500.00
$ 8,250.00
Fixed cost:
Indirect. labor ...............................................
Supervision ...................................................
Factory supplies ............................................
Power ..............................................................
Rework operations ........................................
Payroll taxes ..................................................
Repair and maintenance ...............................
Property insurance........................................
Property taxes................................................
Vacation pay...................................................
Employee pension costs .............................
Employee health plan....................................
Machinery depreciation ................................
Water and heat...............................................
Building occupancy ......................................
General factory ..............................................
$ 2,500.00
1,800.00
500.00
150.00
600.00
1,000.00
350.00
150.00
200.00
1,800.00
1,200.00
500.00
450.00
400.00
900.00
1,000.00
$ 2,500.00
1,800.00
500.00
150.00
600.00
1,000.00
350.00
150.00
200.00
1,800.00
1,200.00
500.00
450.00
400.00
900.00
1,000.00
$ 2,500.00
1,800.00
500.00
150.00
600.00
1,000.00
350.00
150.00
200.00
1,800.00
1,200.00
500.00
450.00
400.00
900.00
1,000.00
$ 2,500.00
1,800.00
500.00
150.00
600.00
1,000.00
350.00
150.00
200.00
1,800.00
1,200.00
500.00
450.00
400.00
900.00
1,000.00
$13,500.00
$13,500.00
$13,500.00
$13,500.00
$19,500.00
$20,250.00
$21,000.00
$21,750.00
17-28
Chapter 17
P17-6 (Concluded)
(2)
ASSEMBLY DEPARTMENT
Variance Report
For the Month Ending August 31, 20
Budget
Allowance
Normal
Capacity
1,350
90%
Budget
Allowance
Actual
Capacity
1,290
86%
$ 3,037.50
1,620.00
472.50
675.00
472.50
202.50
270.00
$ 6,750.00
$ 2,902.50
1,548.00
451.50
645.00
451.50
193.50
258.00
$ 6,450.00
$ 3,250.00
1,654.00
465.00
488.25
451.50
1,175.75
385.00
$ 7,869.50
$ 347.50
106.00
13.50
(156.75)
0.00
982.25
127.00
$ 2,500.00
1,800.00
500.00
150.00
600.00
1,000.00
350.00
150.00
200.00
1,800.00
1,200.00
500.00
450.00
400.00
900.00
1,000.00
$ 2,500.00
1,800.00
500.00
150.00
600.00
1,000.00
350.00
150.00
200.00
1,800.00
1,200.00
500.00
450.00
400.00
900.00
1,000.00
$ 2,500.00
1,800.00
500.00
150.00
600.00
1,000.00
350.00
165.00
210.50
2,200.00
1,200.00
500.00
450.00
465.00
900.00
1,000.00
$13,500.00
$20,250.00
$13,500.00
$19,950.00
$13,990.50
$21,860.00
Actual
Cost
Spending
Variance
unfav.
(fav.)
0.00
0.00
0.00
0.00
0.00
0.00
0.00
15.00
10.50
400.00
0.00
0.00
0.00
65.00
0.00
0.00
$1,910.00
unfav.
19,350.00
600.00 unfav.
$21,860.00
19,350.00
$ 2,510.00
$ 1,910.00 unfav.
600.00 unfav.
$ 2,510.00
Chapter 17
17-29
CASES
C17-1
(1)
(2)
The factors that influence the behavior of the production managers, described in
the case, conflict with the factors that motivate the maintenance managers. The
production managers have been given a monetary incentive to improve the
costs in their own departments. They require the support of the other departments, (e.g., Storeroom and Maintenance) to achieve their objective; but the
incentives (monetary and otherwise) have not changed in the other departments.
To improve their costs and earn the incentives, the production managers
have postponed repairs; demanded emergency repairs more frequently than in
the past; demanded repair work be done more quickly to reduce downtime;
demanded special treatment in some cases; placed undue pressures on maintenance managers; and complained about the maintenance charges.
The results of the demands by the production managers conflict with the following factors, which appear to be important to the maintenance managers and
reflect on their performance: good relations with other managers; high quality
repair work, including making machinery safe and maintaining its normal life;
and orderly work scheduling.
If monetary incentives to the production managers are to be continued, complaints and conflicts could be reduced by revising the charging system as follows: develop predetermined hourly charging rates for each skill level within the
Maintenance Department; develop predetermined or budgeted hours for routine
or repetitive maintenance work; develop budgeted costs for parts and materials;
use maintenance job time cards that are initialed by production managers when
the job is done; and develop a penalty rate to be charged to those production
managers who need quick service that could have been avoided by timely maintenance scheduling.
Increased productivity and reduced conflicts between managers probably
could be more effectively achieved by revising the reward and evaluation structure. Evaluations and rewards for individual efforts should be eliminated, and
cooperation and continuous improvement should be encouraged and rewarded.
High rejection rates and internal conflict suggest that far more is wrong with the
current system than just the charging rates.
17-30
Chapter 17
C17-2
(1)
(2)
Chapter 17
17-31
C17-2 (Concluded)
(c) The companys present reward system of giving bonuses based on a managers ability to meet budget tends to place too much emphasis on the shortterm, to the possible detriment of the long-term. Managers are making
decisions to ensure their bonuses instead of maximizing the overall company objectives. An example of this might be the decision of Valquez to lay
off workers to save $1,000 in this period and, therefore, get the bonus, even
though output was reduced. This action would result in added costs of
$1,500 to replace the workers in the next period.
(d) Generally, an all or nothing bonus system such as this is a poor motivator,
because too much emphasis is placed on meeting the budget. This may lead
to a lack of goal congruence as evidenced in this casemanipulation of the
data to meet the budget in one particular period and/or overall employee
frustration due to their inability to meet unrealistic budgets.
(e) The companys overall attitude seems to be that variances from budget represent poor performance by the managers. This could lead to serious motivational and morale problems with the staff. Emphasis should be placed on
the fact that variances are only attention directors and indicate the need to
investigate why things were different from expected. The variances may indicate that the original budget was wrong and should be up-dated (for example, the price of part # 88 would appear to be unrealistic), that overall
company objectives and/or procedures need to be changed, or that things
have happened that are different from expected but beyond the control of
anyone within the organization.
(f) The company would appear to be using a static budget for its evaluations,
as evidenced by the fact that Valquez and Dixon received their bonuses for
being under their original budgeted costs for the period. It is also evidenced
by the fact that Winston had an annual limit to the amount of air freight costs
allowed instead of an allowance based on the total purchases made in the
period. Evaluations should be based on a comparison of actual results and
expected results using a flexible budget, based on actual levels of activity
achieved. This is to isolate the variances caused by efficiencies/inefficiencies
as opposed to those caused by a change in volume of activity from that which
was originally expected.
17-32
Chapter 17
C17-3
(1)
(2)
(3)
(a)
Chapter 17
17-33
C17-3 (Concluded)
(c) Separate controllable costs from noncontrollable costs and clearly identify
those elements of the report for which the production manager is directly
responsible. These actions will provide a more meaningful analysis of operations and managers will know responsibilities.
(d) A variance column that highlights both favorable and unfavorable circumstances would provide a less negative report. Significant variances could be
highlighted to draw attention to them.
C17-4
(1)
17-34
Chapter 17
C17-4 (Concluded)
(2)