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Problem P1-5 Performance Reports

At the end of 2011, Cyril Fedako, CFO for Fedako Products, received a report comparing budgeted and actual production costs for the company’s plant in Forest Lake, Minnesota:

Units 60,000

Original Budget Actual Costs Actual – Original

Material (variable) \$3,200,000 \$3,500,000 \$300,000

Direct labor (variable) \$2,300,000 \$2,500,000 \$200,000

Supervisory salaries (fixed) \$475,000 \$500,000 \$25,000

Utilities (variable) \$125,000 \$135,000 \$10,000

Machine maintenance (fixed) \$350,000 \$380,000 \$30,000

Depreciation of building (fixed) \$90,000 \$90,000 \$0

Depreciation of equipment (fixed) \$250,000 \$255,000 \$5,000

Janitorial (fixed) \$220,000 \$235,000 \$15,000

Total \$7,010,000 \$7,595,000 \$585,000

His first thought was that costs must be out of control since actual costs exceed the budget by \$ 585,000. However, he quickly recalled that the budget was set assuming a production level of 60,000 units. The Forest Lake plant actually produced 65,000 units in 2011.

a. Given that production was greater than planned, should Cyril expect that all actual costs will be greater than budgeted? Which costs would you expect to increase, and which costs would you expect to remain relatively constant?

b. Cyril is extremely busy” the company has six other plants. Therefore, he cannot spend time investigating every departure from the budget. With this in mind, which cost( s) should Cyril concentrate on in his investigation of budget differences?

Cyril should only investigate significant departures from the budget. Only three of the differences are more than 5 percent of the revised budget amounts. Assuming he defines differences in excess of 5 percent to be significant, Cyril should investigate supervisory salaries, machine maintenance, and janitorial costs.