Complete the following exercise: Frank Weston (Jim Smith), supervisor of the Freemont Corporation's (Harbor View) 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
Planning Budget Actual Results Variances
Machine-hours 35,000 38,000
Direct labor wages $80,500 $86,100 $5,600 U
Supplies 21,000 23,100 2,100 U
Maintenance 134,000 137,300 3,300 U
Utilities 15,200 15,700 500 U
Supervision 38,000 38,000 0
Depreciation 80,000 80,000 0
Total $368,700 $380,200
"I just can't understand all the red ink," 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 $92,000; the fixed component of the budgeted utilities cost is $11,700.
Evaluate the company's cost control report and explain why the variances were all unfavorable.
Prepare a performance report that will help Mr. Weston's superiors assess how well costs were controlled in the Machining Department.
Report and commentary in Excel is provided in the response with formulas in cells. This solution is for intermediate level (not novice) as it assumes you know what a static and flexible budget are and can quickly discern how the flexible budget solves the issue.