Vanadium Audio Inc. is a small manufacturer of electronic musical instruments. The plant man- ager received the following variable factory overhead report for the past month of operations: Budgeted Variable Factory Overhead at Actual Production Controllable Variance Actual Supplies $ 42,000 52,500 $ 39,780 50,900 $ 2,220 U Power and light Indirect factory wages 1,600 U 39,100 $133,600 30,600 $121,280 8,500 U $12,320 U Total Actual units produced: 15,000 (90% of practical capacity) The plant manager is not pleased with the $12,320 unfavorable variable factory overhead controllable variance and has come to discuss the matter with the controller. The following discussion occurred: Plant Manager: I just received this factory report for the latest month of operations. I'm not very pleased with these figures. Before these numbers go to headquarters, you and I need to reach an understanding. Controller: Go ahead. What's the problem? Plant Manager: What's the problem? Well, everything. Look at the variance. It's too large. If I understand the accounting approach being used here, you are assuming that my costs are variable to the units produced. Thus, as the production volume declines, so should these costs. Well, I don't believe these costs are variable at all. I think they are fixed costs. As a result, when we operate below capacity, the costs really don't go down. I'm being penalized for costs I have no control over. I need this report to be redone to reflect this fact. If anything, the difference between actual and budget is essentially a volume variance. Listen, I know that you're a team player. You really need to reconsider your assumptions on this one. Assume you are the controller. Write a memo responding to the plant manager.
Vanadium Audio Inc. is a small manufacturer of electronic musical instruments. The plant man- ager received the following variable factory overhead report for the past month of operations: Budgeted Variable Factory Overhead at Actual Production Controllable Variance Actual Supplies $ 42,000 52,500 $ 39,780 50,900 $ 2,220 U Power and light Indirect factory wages 1,600 U 39,100 $133,600 30,600 $121,280 8,500 U $12,320 U Total Actual units produced: 15,000 (90% of practical capacity) The plant manager is not pleased with the $12,320 unfavorable variable factory overhead controllable variance and has come to discuss the matter with the controller. The following discussion occurred: Plant Manager: I just received this factory report for the latest month of operations. I'm not very pleased with these figures. Before these numbers go to headquarters, you and I need to reach an understanding. Controller: Go ahead. What's the problem? Plant Manager: What's the problem? Well, everything. Look at the variance. It's too large. If I understand the accounting approach being used here, you are assuming that my costs are variable to the units produced. Thus, as the production volume declines, so should these costs. Well, I don't believe these costs are variable at all. I think they are fixed costs. As a result, when we operate below capacity, the costs really don't go down. I'm being penalized for costs I have no control over. I need this report to be redone to reflect this fact. If anything, the difference between actual and budget is essentially a volume variance. Listen, I know that you're a team player. You really need to reconsider your assumptions on this one. Assume you are the controller. Write a memo responding to the plant manager.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text:Vanadium Audio Inc. is a small manufacturer of electronic musical instruments. The plant man-
ager received the following variable factory overhead report for the past month of operations:
Budgeted Variable
Factory Overhead at
Actual Production
Controllable
Variance
Actual
Supplies
$ 42,000
52,500
$ 39,780
50,900
$ 2,220 U
Power and light
Indirect factory wages
1,600 U
39,100
$133,600
30,600
$121,280
8,500 U
$12,320 U
Total
Actual units produced: 15,000 (90% of practical capacity)
The plant manager is not pleased with the $12,320 unfavorable variable factory overhead
controllable variance and has come to discuss the matter with the controller. The following
discussion occurred:
Plant Manager: I just received this factory report for the latest month of operations. I'm not
very pleased with these figures. Before these numbers go to headquarters, you and I need to
reach an understanding.
Controller: Go ahead. What's the problem?
Plant Manager: What's the problem? Well, everything. Look at the variance. It's too large. If
I understand the accounting approach being used here, you are assuming that my costs are
variable to the units produced. Thus, as the production volume declines, so should these costs.
Well, I don't believe these costs are variable at all. I think they are fixed costs. As a result, when
we operate below capacity, the costs really don't go down. I'm being penalized for costs I have
no control over. I need this report to be redone to reflect this fact. If anything, the difference
between actual and budget is essentially a volume variance. Listen, I know that you're a team
player. You really need to reconsider your assumptions on this one.
Assume you are the controller. Write a memo responding to the plant manager.
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