Question

Frank Weston, supervisor of the Freemont Corporation’s Machining Department, was visibly upset after being reprimanded for his department’s poor performance over the prior month. The department’s cost control report is given below:

Freemont Corporation–Machining Department
Cost Control Report
For the Month Ended June 30
Actual Results Planning Budget Variances
Machine-hours 42,000 40,000
Direct labor wages $ 87,000 $ 84,400 $ 2,600 U
Supplies 27,300 24,800 2,500 U
Maintenance 24,400 22,500 1,900 U
Utilities 22,100 21,100 1,000 U
Supervision 53,000 53,000 0
Depreciation 91,000 91,000 0
Total $ 304,800 $ 296,800 $ 8,000 U


“I just can’t understand all of these unfavorable variances,” Weston complained to the supervisor of another department. “When the boss called me in, I thought he was going to give me a pat on the back because I know for a fact that my department worked more efficiently last month than it has ever worked before. Instead, he tore me apart. I thought for a minute that it might be over the supplies that were stolen out of our warehouse last month. But they only amounted to a couple of hundred dollars, and just look at this report. Everything is unfavorable.”



Direct labor wages and supplies are variable costs; supervision and depreciation are fixed costs; and maintenance and utilities are mixed costs. The fixed component of the budgeted maintenance cost is $16,900; the fixed component of the budgeted utilities cost is $14,000.

Complete the performance report that will help Mr. Weston’s superiors assess how well costs were controlled in the machining department.

Answer 1

Cost control involves managing both variable and fixed costs. For the Freemont Corporation's Machining Department, unfavorable variances in variable costs need investigation, despite potential efficiency gains from increased machine use. Total costs are best understood by evaluating both fixed and variable components, as illustrated by the example of 'The Clip Joint' barber shop.

Step-by-step explanation:

When assessing Mr. Weston's cost control performance, we need to consider both variable and fixed costs as part of the total costs for the Freemont Corporation's Machining Department. Since direct labor wages and supplies are variable costs, they will change in proportion to the level of production activity or volume, such as machine-hours. Fixed costs, like supervision and depreciation, remain constant regardless of the production volume. However, maintenance and utilities are mixed costs comprising both variable and fixed components.

According to the provided report, Mr. Weston should investigate the reasons behind the unfavorable variances in variable costs, which could include factors like increased wages or unexpected increases in supplies' prices. Even though the overtime work might have resulted in increased efficiency, the financial impact of higher costs needs to be addressed. It's also important to analyze the theft of supplies and consider any other inefficiencies or changes that might have occurred during the last month.

Total costs can be analyzed using an example such as 'The Clip Joint' barber shop, where the fixed costs are $160 per day, and variable costs are $80 per barber per day. This illustrates how total costs are calculated by combining both types of costs, highlighting the importance of managing each for overall cost control.