Question

		Actual	Budget	Variances
	Direct Materials	216630	237600	20970 F
	Direct Labor	119340	132000	12660 F
	Variable Overhead	63000	66000	3000 F
	Fixed Overhead	184000	184000
	Total	582970	619600	36630 F

Midwest Furniture Company manufactures office furniture. John Frisco, the new controller, presented the following financial data for the month of November at the monthly management meeting: Performance Report for the month of November, 2018 Actual Budget Variances Direct Materials 216,630 237,600 20,970 F Direct Labor 119,340 132,000 12,660 F Variable Overhead 63,000 66,000 3,000 F Fixed Overhead 184,000 184,000 582,970 619,600 36,630 F John was recently hired and was enthusiastic to share the positive results with the management team showing that the company had favorable variances for the manufacturing related costs. After the management meeting, Susan Michaels, the general manager of Midwest asks you to review John's report. She is concerned because the company had never operated as favorably as John's report indicated and she had no explanation for the significant improvement. During your review of John's report, you learn that the company uses a flexible budget and the normal operating capacity is 8,800 units of product. The standard costs per unit are direct materials of 3 lbs at $9 per pound, direct labor of 1.25 hrs at $12 per hour, overhead is applied to the product on the basis of direct labor hours at $6 per hour for variable overhead and $18.40 per hour for fixed overhead. For November, Midwest produced 8,000 units of product using 24,900 lbs of direct materials at a cost of $8.70 per pound, 10,200 hours of direct labor at an average cost of $11.70 per hour, and incurred variable overhead costs of $63,000 and fixed overhead costs of $184,000. Instructions: Verify if John's actual and budget figures are correct and, if not, make the necessary adjustments to John's performance report. Analyze the performance report to identify the source of the variances and isolate potential causes for the variances. Write a memo to Susan Michael's communicating the results of your review of the performance report and, if necessary, a revised performance report. Include in your memo to Susan, your conclusions from the variance analysis and potential causes for the variances.

Answer 1