Problem:
Don's company has a comprehensive budgeting system in operation for several years. Feelings vary among the managers as to the value and benefit of the system. The line supervisors are very happy with the reports being prepared on their performance, but upper management often expresses dissatisfaction over the reports being prepared on various phases of the company's operations. A typical manufacturing overhead performance report for a recent period is shown below:
Don's Company
Overhead Performance Report-Milling Department
For the Quarter Ended June 30
Actual Budget Variance
Machine hours 25,000 30,000
Variable overhead:
Indirect labor $20,000 $22,500 $2,500 F
Supplies 5,400 6,000 600 F
Utilities 27,000 30,000 3,000 F
Rework 14,000 15,000 1,000 F
Total variable overhead cost 66,400 73,500 7,100 F
Fixed overhead:
Maintenance 61,900 60,000 1,900 U
Inspection 90,000 90,000 0
Total fixed overhead cost 151,000 150,000 1,900 U
Total overhead cost $218,300 $223,500 $5,200 F
After receiving a copy of this performance report, the supervisor of the drilling department stated, "No one can complain about my department; our variances have been favorable for over a year now. We've saved the company thousands of dollars by our excellent cost control."
The budget data above are the original planned level of activity for the quarter.
Required to do:
1. The production superintendent is uneasy about the performance reports being prepared and would like an evaluation of the usefulness to the company.
2. What changes, if any, should be made in the overhead performance report to give better insight into how well the supervisor is controlling cost?
3. Prepare a new overhead performance report for the quarter, incorporating any changes you suggested in (2) above. Include the variable and the fixed costs in your report.