Overhead variances, ethics. Hartmann Company uses standard costing. The company has two manufacturing plants, one in Georgia and the other in Alabama. For the Georgia plant, Hartmann has budgeted annual output of 2,000,000 units. Standard labor-hours per unit are 0.50, and the variable overhead rate for the Georgia plant is $3.30 per direct labor-hour. Fixed overhead for the Georgia plant is budgeted at $2,400,000 for the year. For the Alabama plant, Hartmann has budgeted annual output of 2,100,000 units with standard laborhours also 0.50 per unit. However, the variable overhead rate for the Alabama plant is $3.10 per hour, and the budgeted fixed overhead for the year is only $2,205,000. Firm management has always used variance analysis as a performance measure for the two plants and has compared the results of the two plants. Tom Saban has just been hired as a new controller for Hartmann. Tom is good friends with the Alabama plant manager and wants him to get a favorable review. Tom suggests allocating the firm’s budgeted common fixed costs of $3,150,000 to the two plants, but on the basis of one-third to the Alabama plant and twothirds to the Georgia plant. His explanation for this allocation base is that Georgia is a more expensive state than Alabama. At the end of the year, the Georgia plant reported the following actual results: output of 1,950,000 using 1,020,000 labor-hours in total, at a cost of $3,264,000 in variable overhead and $2,440,000 in fixed overhead. Actual results for the Alabama plant are an output of 2,175,000 units using 1,225,000 labor-hours with a variable cost of $3,920,000 and fixed overhead cost of $2,300,000. The actual common fixed costs for the year were $3,075,000. 1. Compute the budgeted fixed cost per labor-hour for the fixed overhead separately for each plant: a. Excluding allocated common fixed costs b. Including allocated common fixed costs 2. Compute the variable overhead spending variance and the variable overhead efficiency variance separately for each plant. 3. Compute the fixed overhead spending and volume variances for each plant: a. Excluding allocated common fixed costs b. Including allocated common fixed costs 4. Did Tom Saban’s attempt to make the Alabama plant look better than the Georgia plant by allocating common fixed costs work? Why or why not? 5. Should common fixed costs be allocated in general when variances are used as performance measures? Why or why not? 6. What do you think of Tom Saban’s behavior overall?
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.
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