Overhead Performance Report
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Preparing an Overhead Performance Report
Several years ago, Edwards Inc. developed a comprehensive budgeting system for profit planning and control purposes. The line supervisors have been very happy with the system and with the reports being prepared on their performance, but both middle and upper management have expressed considerable dissatisfaction with the information being generated by the system. A typical manufacturing overhead performance report for a recent period follows:
Edwards Inc.
Overhead Performance Report - Machining Department
For the Quarter Ended June 30
Actual Budget Variance
Machine-hours..................................... 20,000 24,000
Variable overhead costs:
Indirect materials............................... $15,200 $16,800 $1,600 F
Rework............................................ 4,200 4,800 600 F
Utilities............................................ 34,200 36,000 1,800 F
Machine setup.................................. 9,400 9,600 200 F
Total variable overhead cost.................... 63,000 67,200 4,200 F
Fixed overhead costs:
Maintenance..................................... 64,300 65,000 700 F
Inspection........................................ 54,000 54,000 0
Total fixed overhead cost........................ 118,300 119,000 700 F
Total overhead cost............................... $181,300 $186,200 $4,900 F
After receiving a copy of this overhead performance report, the supervisor of the Machining Department stated, "These reports are super. It makes me feel really good to see how well things are going in my department. I can't understand why those people upstairs complain so much."
The budget data above are for the original planned level of activity for the quarter.
Required:
1. The company's vice president is uneasy about the performance reports being prepared and would like you to evaluate their usefulness to the company.
2. What changes, if any, should be made in the overhead performance report to give better insight into how well the supervisor is controlling costs?
3. Prepare a new overhead performance report for the quarter, incorporating any changes you suggested in (2) above. (Include both the variable and the fixed costs in your report.)
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1. The company's vice president is uneasy about the performance reports being prepared and would like you to evaluate their usefulness to the company.
The reports are not useful. The reason is that the report compares a static budget with the actual when the level of activity has changed. The static budget is 24,000 hours while the actual is 20,000 hours. The costs which vary with hours would be different and should not be compared with the cost at 24,000 hours. That is the reason that variable costs are favorable. The fixed costs should be compared with actual fixed costs.
2. What changes, if any, should be made in ...
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