Problem:
(Flexible budget; variances; cost control) The Sioux City Storage System's plant prepared the following flexible overhead budget for three levels of activity within the plant's relevant range.
|
12,000 units
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16,000 units
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20,000 units
|
|
Variable overhead
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$48,000
|
$64,000
|
$ 80,000
|
|
Fixed overhead
|
32,000
|
32,000
|
32,000
|
|
Total overhead
|
$80,000
|
$96,000
|
$112,000
|
After discussion with the home office, the plant managers planned to produce 16,000units of its single product during 2010. However, demand for the product was exceptionally strong, and actual production for 2010 was 17,600 units. Actual variable and fixed overhead costs incurred in producing the 17,600 units were $69,000 and $32,800,respectively.
The production manager was upset because the company planned to incur $96,000 of costs and actual costs were $101,800. Prepare a memo to the production manager regarding the following questions.
a. Should the $101,800 actual total cost be compared to the $96,000 expected total cost for control purposes? Explain the rationale for your answer.
b. Analyze the costs and explain where the company did well or poorly in controlling its costs.