(Cost control evaluation) McNeal Concrete makes precast concrete steps for use with manufactured housing. The company had the following 2010 budget based on expected production of 6,400 units:
|
Standard Cost |
Amount Budgeted |
|
|
Direct material |
$22.00 |
$140,800 |
|
Direct labor |
12.00 |
76,800 |
|
Variable overhead |
|
|
|
Indirect material |
4.20 |
26,880 |
|
Indirect labor |
1.75 |
11,200 |
|
Utilities |
1.00 |
6,400 |
|
Fixed overhead |
|
|
|
Supervisory salaries |
|
80,000 |
|
Depreciation |
|
30,000 |
|
Insurance |
|
19,280 |
|
Total |
|
$391,360 |
|
Cost per unit = $391,380 ÷ 6,400 = $61.15 |
||
Actual production for 2010 was 7,000 units, and actual costs for the year were as follows:
|
Direct material used |
$161,000 |
|
Direct labor |
84,600 |
|
Variable overhead |
|
|
Indirect material |
28,000 |
|
Indirect labor |
13,300 |
|
Utilities |
7,700 |
|
Fixed overhead |
|
|
Supervisory salaries |
82,000 |
|
Depreciation |
30,000 |
|
Insurance |
17,600 |
|
Total |
$424,200 |
|
Cost per unit = $424,200 ÷ 7,000 = $60.60 |
|
The plant manager, Tanzi Palate, whose annual bonus includes (among other factors) 20 percent of the net favorable cost variances, states that he saved the company $3,850 [($61.15 − $60.60) X 7,000]. 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 in the preceding annual budget to prove the $3,850 cost savings.
a. Is the actual to budget comparison proposed by Palate appropriate? If his comparison is not appropriate, prepare a more appropriate comparison.
b. How would you, as the plant cost accountant, react if Palate insisted on his comparison? Suggest what alternatives are available to you.