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How do I identify and explain the classic budgeting error that Harlow apparently incorporated into his original cost report?

How do I identify and explain the classic budgeting error that Harlow apparently incorporated into his original cost report?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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How do I identify and explain the classic budgeting error that Harlow apparently incorporated into his original cost report?

variances? Explain. and total standard costs equal the sum of all of the EXTENDING YOUR KNOWLE TYK 10-1. Business Decision Case Porter Corporation has just hired Bill Harlow as its new controller. Al- though Harlow has had little formal accounting training, he professes to be highly experienced, X having learned accounting "the hard way'" in the field. At the end of his first month's work, Harlow prepared the following performance report:
Transcribed Image Text:variances? Explain. and total standard costs equal the sum of all of the EXTENDING YOUR KNOWLE TYK 10-1. Business Decision Case Porter Corporation has just hired Bill Harlow as its new controller. Al- though Harlow has had little formal accounting training, he professes to be highly experienced, X having learned accounting "the hard way'" in the field. At the end of his first month's work, Harlow prepared the following performance report:
Chapter 10 Standard Costing and Variance Analysis PORTER CORPORATION Performance Report for the Month of June, 2018 Total Actual Total Budgeted Costs Costs Variances $237,600 $20,970 F $216,630 119,340 Direct materials. 12,660 F Direct labor. 3,000 F .. Variable overhead 184,000 Fixed overhead. $582,970 $619,600 $36,630 F In his presentation at Porter's month-end management meeting, Harlow indicated that things were going "fantastically." "The figures indicate," he said, "that the firm is beating its budget in all cost categories." This good news made everyone at the meeting happy and furthered Harlow's acceptance as a member of the management team. After the management meeting, Susan Jones, Porter's general manager, asked you, as an inde- pendent consultant, to review Harlow's report. Jones' concern stemmed from the fact that Porter has never operated as favorably as Harlow's report seems to imply, and she cannot explain the apparent significant improvement. While reviewing Harlow's report, you are provided the following cost and operating data for June: Porter has a monthly normal capacity of 11,000 direct labor hours or 8,800 units of product. Standard costs per unit for its only product are direct materials 3 pounds at $9 per pound; direct labor, 1.25 hours at $12 per hour; and variable overhead rate per direct labor hour of $6. During June, Porter produced 8,000 units of product, using 24,900 pounds of materials costing $8.70 each, 10,200 direct labor hours at an average rate of $11.70 each, and incurred variable overhead costs of $63,000 and fixed overhead costs of $184,000. After reviewing Porter's June cost data, you tell Harlow that his cost report contains a classic budgeting error, and you explain how he can remedy it. In response to your suggestion, Harlow revises his report as follows: 66 Total Actual Total Budgeted Costs Costs Variances Direct materials. $ 630 U $216,630 119,340 $216,000 Direct labor. Variable overhead Fixed overhead. n 000' $582,970 $580,000 $2,970 U Harlow's revised report is accompanied by remarks expressing regret at the oversight n ue original report. Required In your role as consultant, Verify that Harlow's actual cost figures are correct. b. Identify and explain the classic budgeting error that Harlow apparently incorporated into ie original cost report. c. Explain why Harlow's revised figures could be considered deficient. a. Further analyze Harlow's revised variances, isolating underlying potential causal Tacio d. How do your analyses indicate bases for concern to management? FYK10
Transcribed Image Text:Chapter 10 Standard Costing and Variance Analysis PORTER CORPORATION Performance Report for the Month of June, 2018 Total Actual Total Budgeted Costs Costs Variances $237,600 $20,970 F $216,630 119,340 Direct materials. 12,660 F Direct labor. 3,000 F .. Variable overhead 184,000 Fixed overhead. $582,970 $619,600 $36,630 F In his presentation at Porter's month-end management meeting, Harlow indicated that things were going "fantastically." "The figures indicate," he said, "that the firm is beating its budget in all cost categories." This good news made everyone at the meeting happy and furthered Harlow's acceptance as a member of the management team. After the management meeting, Susan Jones, Porter's general manager, asked you, as an inde- pendent consultant, to review Harlow's report. Jones' concern stemmed from the fact that Porter has never operated as favorably as Harlow's report seems to imply, and she cannot explain the apparent significant improvement. While reviewing Harlow's report, you are provided the following cost and operating data for June: Porter has a monthly normal capacity of 11,000 direct labor hours or 8,800 units of product. Standard costs per unit for its only product are direct materials 3 pounds at $9 per pound; direct labor, 1.25 hours at $12 per hour; and variable overhead rate per direct labor hour of $6. During June, Porter produced 8,000 units of product, using 24,900 pounds of materials costing $8.70 each, 10,200 direct labor hours at an average rate of $11.70 each, and incurred variable overhead costs of $63,000 and fixed overhead costs of $184,000. After reviewing Porter's June cost data, you tell Harlow that his cost report contains a classic budgeting error, and you explain how he can remedy it. In response to your suggestion, Harlow revises his report as follows: 66 Total Actual Total Budgeted Costs Costs Variances Direct materials. $ 630 U $216,630 119,340 $216,000 Direct labor. Variable overhead Fixed overhead. n 000' $582,970 $580,000 $2,970 U Harlow's revised report is accompanied by remarks expressing regret at the oversight n ue original report. Required In your role as consultant, Verify that Harlow's actual cost figures are correct. b. Identify and explain the classic budgeting error that Harlow apparently incorporated into ie original cost report. c. Explain why Harlow's revised figures could be considered deficient. a. Further analyze Harlow's revised variances, isolating underlying potential causal Tacio d. How do your analyses indicate bases for concern to management? FYK10
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