Home Products Company manufactures a complete line of kitchen glassware. The Beverage Division specializes in 12-ounce drinking glasses. Erin Fisher, the superintendent of the Beverage Division, asked the controller to prepare a report of her division’s performance in April. The following report was handed to her a few days later: Budgeted Actual Difference Under Cost Category Costs* Costs (Over) Budget (Variable Unit Cost) $ 5,000 $ 4,975 $ 25 Direct materials ($0.10) 6,000 5,850 150 Direct labor ($0.12) Variable overhead Indirect labor ($0.03) 1,500 1,290 210 Supplies ($0.02) 1,000 960 40 Heat and power ($0.03) 1,500 1,325 175 Other ($0.05) 2,500 2,340 160 Fixed overhead Heat and power 3,500 3,500 — Depreciation 4,200 4,200 — Insurance and taxes 1,200 1,200 — Other 1,600 1,600 — Totals $28,000 $27,240 $760 In discussing the report with the controller, Fisher stated, “Profits have been decreasing in recent months, but this report indicates that our production process is operating efficiently.” Required a. Prepare a flexible budget for the Beverage Division using production levels of 45,000 units, 50,000 units, and 55,000 units and What is the flexible budget formula? b. Assume that the Beverage Division produced 46,560 units in April and that all fixed costs remained constant. Prepare a revised performance report similar to the one above, using actual production in units as a basis for the budget column. c. Which report is more meaningful for performance evaluation, the original one above or the revised one? Why?
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.
Home Products Company manufactures a complete line of kitchen glassware. The Beverage Division specializes in 12-ounce drinking glasses. Erin Fisher, the superintendent of the Beverage Division, asked the controller to prepare a report of her division’s performance in April. The following report was handed to her a few days later:
|
Budgeted |
Actual |
Difference Under |
||
|
Cost Category |
Costs* |
Costs |
(Over) Budget |
|
|
(Variable Unit Cost) |
$ 5,000 |
$ 4,975 |
$ 25 |
|
|
Direct materials ($0.10) |
6,000 |
5,850 |
150 |
|
|
Direct labor ($0.12) |
|
|
|
|
|
Variable |
|
|
|
|
|
Indirect labor ($0.03) |
1,500 |
1,290 |
210 |
|
|
Supplies ($0.02) |
1,000 |
960 |
40 |
|
|
Heat and power ($0.03) |
1,500 |
1,325 |
175 |
|
|
Other ($0.05) |
2,500 |
2,340 |
160 |
|
|
Fixed overhead |
|
|
|
|
|
Heat and power |
3,500 |
3,500 |
— |
|
|
|
4,200 |
4,200 |
— |
|
|
Insurance and taxes |
1,200 |
1,200 |
— |
|
|
Other |
1,600 |
1,600 |
— |
|
|
Totals |
$28,000 |
$27,240 |
$760 |
|
In discussing the report with the controller, Fisher stated, “Profits have been decreasing in recent months, but this report indicates that our production process is operating efficiently.”
Required
a. Prepare a flexible budget for the Beverage Division using production levels of 45,000 units, 50,000 units, and 55,000 units and What is the flexible budget formula?
b. Assume that the Beverage Division produced 46,560 units in April and that all fixed costs remained constant. Prepare a revised performance report similar to the one above, using actual production in units as a basis for the budget column.
c. Which report is more meaningful for performance evaluation, the original one above or the revised one? Why?
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