Albrecht 19.pdf - Marriott School

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EOC | Controlling Cost, Profit, and Investment Centers Chapter 19 1001
Required:
1. Compute the fixed overhead budget variance for each quarter.
2. Compute the volume variance for each quarter.
3. Interpretive Question: At the end of the third quarter, the production manager at
Willey Corporation believes that favorable volume variance in the third quarter means
that he has more money to spend in production. Explain to the production manager
what the volume variance represents and why it does not indicate that there is more
money to spend in production.
P 19-67
LO5, LO6
Variable Manufacturing Overhead Spending and Efficiency Variances
The following production information is available for Porter Corporation:
Budgeted production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000 units
Actual production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145,000 units
Actual variable manufacturing overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . $175,000
Variable manufacturing overhead applied . . . . . . . . . . . . . . . . . . . . . . . . . . $0.80 per machine hour
Actual fixed manufacturing overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $88,500
Budgeted fixed manufacturing overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . $90,000
Actual machine hours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220,000 hours
Standard machine hours per unit produced . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 machine hours
Required:
1. Calculate the following variances for Porter Corporation:
a. Variable manufacturing overhead spending variance
b. Variable manufacturing overhead efficiency variance
c. Fixed manufacturing overhead budget variance
d. Volume variance
2. Interpretive Question: Explain how the spending variance and the efficiency variance
are used to control overhead costs.
3. Identify cost drivers other than machine hours that might be better measures of spending
and efficient use of variable manufacturing overhead costs.
4. Can machine hours be considered a good cost driver for fixed manufacturing overhead
costs
A N A L Y T I C A L A S S I G N M E N T S
AA 19-68
DISCUSSION
Continuous Improvement Needed
One evening after a strenuous day at the office, Janis Walker, president of Western Mills,
Inc., a leading textile manufacturing firm, was out jogging to help relieve the tensions of
that day’s work. While jogging, she focused her thinking on the firm’s commercial carpeting
division. The major customers of the division are companies that are building new office
buildings, hotels, and motels and need quality carpet in their buildings. The carpet division
is doing quite well, but Walker has a nagging feeling that the division could be doing better.
She decided to discuss the performance of the division with the division manager. When she
arrived home after jogging, Walker called the division manager and arranged a meeting for
the next day.
At the meeting, Walker asked the division manager how long it took to deliver an order
to the building site after production started. The manager’s answer was 17 days. Walker
then asked what the industry average was for delivery. The answer was 15 days. Walker
wanted to know why Western Mills took longer than competitors to meet order requirements.
The manager answered that its product was of a higher quality, so customers were
willing to wait longer for the order to be filled. With this information in hand and without
hesitation, Walker said, “I will give you six months to reduce the delivery time to 10 days!
(continued)