Freemont Corporation–Machining Department Cost Control Report For the Month Ended June 30 Actual Results Planning Budget Variances Machine-hours 42,000 40,000 Direct labor wages $ 74,000 $ 72,400 $ 1,600 U Supplies 22,300 20,800 1,500 U Maintenance 22,500
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.
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:
| Freemont Corporation–Machining Department Cost Control Report For the Month Ended June 30 |
||||
| Actual Results | Planning |
Variances | ||
|---|---|---|---|---|
| Machine-hours | 42,000 | 40,000 | ||
| Direct labor wages | $ 74,000 | $ 72,400 | $ 1,600 | U |
| Supplies | 22,300 | 20,800 | 1,500 | U |
| Maintenance | 22,500 | 20,500 | 2,000 | U |
| Utilities | 20,200 | 19,100 | 1,100 | U |
| Supervision | 43,000 | 43,000 | 0 | |
| 71,000 | 71,000 | 0 | ||
| Total | $ 253,000 | $ 246,800 | $ 6,200 | U |
“I just can’t understand all of these unfavorable variances,” 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 our warehouse last month. But they only amounted to a couple of hundred dollars, and just look at this report. Everything is unfavorable.”
Direct labor wages and supplies are variable costs; supervision and depreciation are fixed costs; and maintenance and utilities are mixed costs. The fixed component of the budgeted maintenance cost is $12,900; the fixed component of the budgeted utilities cost is $13,000.
Required:
2. Complete the performance report that will help Mr. Weston’s superiors assess how well costs were controlled in the machining department. (Round your intermediate calculations to 2 decimal places. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)
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