Practical Products plans to manufacture 8,000 units over the next month at the following costs: direct materials, $480,000; direct labor, $60,000; variable manufacturing overhead, $150,000; straight-line depreciation, $24,000, and other fixed manufacturing overhead, $272,000. The result is total budgeted cost of $990,000.Shortly after the conclusion of the month, Practical Products reported the following costs:Direct materials used$490,500Direct labor69,600Variable manufacturing overhead132,000Depreciation24,000Other fixed manufacturing overhead272,000Total$988,100Supervisor, Calvin Moore and his crews turned out 7,200 units-a remarkable feat given that the company's manufacturing plant was closed for several days because of blizzards and impassable roads. Moore was especially pleased
with the fact that total actual costs were less than budget. He was thus very surprised when Practical's general manager expressed unhappiness about the plant's financial performance.Required: A. Prepare a performance report that fairly compares budgeted and actual costs for the period just ended-namely, the report that the general manager likely used when assessing performance.B. Should Moore be praised for "having met the budget" or is the general manager's unhappiness justified? Explain, citing any apparent problems for the firm.
What will be an ideal response?
A.
| ? | Budget 7,200 units | Actual 7,200 units | Variance |
| Direct materials used ($60) | $432,000 | $490,500 | $58,500 U |
| Direct labor ($7.50) | 54,000 | 69,600 | 15,600 U |
| Variable manufacturing overhead ($18.75) | 135,000 | 132,000 | 3,000 F |
| Depreciation | 24,000 | 24,000 | --- |
| Other fixed manufacturing overhead | 276,000 | 272,000 | 4,000 F |
| Total | $921,000 | $988,100 | $67,100 U |
Budget calculations:
Direct materials used: $480,000 ÷ 8,000 units = $60.00 per unit
Direct labor: $60,000 ÷ 8,000 units = $7.50 per unit
Variable manufacturing overhead: $150,000 ÷ 8,000 units = $18.75 per unit
B. The general manager's unhappiness is appropriate because of the variances that have arisen. By comparing the original budget of $990,000 vs. actual costs of $988,100, Moore appears to have met the budget. Bear in mind, though, that volume was below the original monthly expectation of 8,000 units-presumably because of the plant closure. A reduced volume will likely lead to lower variable costs than anticipated (and resulting favorable variances).
When the volume differential is removed, variable cost variances turn unfavorable for direct materials and direct labor. These two amounts are, respectively, 13.5% and 28.9% greater than budget.
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