(Cost control evaluation) The Arizona Concrete Company makes precast concrete steps for use with manufactured housing. The plant had the following 2001 budget based on expected production of 3,200 units:
|
Standard Cost |
Amount Budgeted |
|
|
Direct material |
$22.00 |
$ 70,400 |
|
Direct labor |
12.00 |
38,400 |
|
Variable overhead: |
||
|
Indirect material |
4.20 |
13,440 |
|
Indirect labor |
1.75 |
5,600 |
|
Utilities |
1.00 |
3,200 |
|
Fixed overhead: |
||
|
Supervisory salaries |
40,000 |
|
|
Depreciation |
15,000 |
|
|
Insurance |
9,640 |
|
|
Total |
$195,680 |
|
Cost per unit _ $195,680 _ 3,200 _ $61.15 Actual production for 2001 was 3,500 units, and actual costs for the year were as follows:
|
Direct material used |
$ 80,500 |
|
Direct labor |
42,300 |
|
Variable overhead: |
|
|
Indirect material |
14,000 |
|
Indirect labor |
6,650 |
|
Utilities |
3,850 |
|
Fixed overhead: |
|
|
Supervisory salaries |
41,000 |
|
Depreciation |
15,000 |
|
Insurance |
8,800 |
|
Total |
$212,100 |
Cost per unit _ $212,100 _ 3,500 _ $60.60 The plant manager, John Wessly, whose annual bonus includes (among other factors) 20 percent of the net favorable cost variances, states that he saved the company $1,925 [($61.15 _ $60.60) _ 3,500]. He has instructed the plant cost accountant to prepare a detailed report to be sent to corporate headquarters comparing each component’s actual per unit cost with the per unit amounts set forth above in the annual budget to prove the $1,925 cost savings.
a. Is the actual to budget comparison proposed by Wessly an appropriate one? If Wessly’s comparison is not appropriate, prepare a more appropriate comparison.
b. How would you, as the plant cost accountant, react if Wessly insisted on his comparison? Suggest what alternatives are available to you.