Carpenter Company uses standard costing. The company has a manufacturing plant in Georgia. Standard labour-hours per unit are 0.50, and the variable overhead rate for the Georgia plant is $3.50 per direct labour-hour. Fixed overhead for the Georgia plant is budgeted at $1,800,000 for the year. Firm management has always used variance analysis as a performance measure for the plant. Tom Saban has just been hired as a new controller for Carpenter Company. Tom is good friends with the Georgia plant manager and wants him to get a favourable review. Tom decides to underestimate production, and budgets annual output of 1,200,000 units. His explanation for this is that the economy is slowing and sales are likely to decrease. At the end of the year, the plant reported the following actual results: output of 1,500,000 using 760,000 labour-hours in total, at a cost of $2,700,000 in variable overhead and $1,850,000 in fixed overhead. Briefly answer the following questions (and then respond to at least two of your classmates): Did Tom Saban’s attempt to
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Carpenter Company uses
Tom Saban has just been hired as a new controller for Carpenter Company. Tom is good friends with the Georgia plant manager and wants him to get a favourable review. Tom decides to underestimate production, and budgets annual output of 1,200,000 units. His explanation for this is that the economy is slowing and sales are likely to decrease.
At the end of the year, the plant reported the following actual results: output of 1,500,000 using 760,000 labour-hours in total, at a cost of $2,700,000 in variable overhead and $1,850,000 in fixed overhead.
Briefly answer the following questions (and then respond to at least two of your classmates):
- Did Tom Saban’s attempt to make his friend, the plant manager, look better work?
- Why or why not?
- What do you think of Tom Saban’s behaviour overall?
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