Company uses standard costing-compute budgeted fixed cost

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Reference no: EM131464681

ABC Company uses standard costing. The company has two manufacturing plants, one in California and the other in Michigan. For the California plant, ABC has budgeted annual output of 8,000,000 units. Standard labor hours per unit are 0.50, and the variable overhead rate for the California plant is $6.50 per direct labor hour. Fixed overhead for the California plant is budgeted at $5,000,000 for the year.

For the Michigan plant, ABC has budgeted annual output of 8,400,000 units with standard labor hours also 0.50 per unit. However, the variable overhead rate for the Michigan plant is $6.00 per hour, and the budgeted fixed overhead for the year is only $4,620,000.

Firm management has always used variance analysis as a performance measure for the two plants, and has compared the results of the two plants.

Judy Jackson has just been hired as a new controller for ABC. Judy is good friends with the Michigan plant manager and wants her to get a favorable review. Judy suggests allocating the firm’s budgeted common fixed costs of $6,300,000 to the two plants, but on the basis of one-third to the Michigan plant and two-thirds to the California plant. Her explanation for this allocation base is that California is a more expensive state than Michigan.

At the end of the year, the California plant reported the following actual results: output of 7,800,000 using 2,028,000 labor hours in total, at a cost of $6,489,600 in variable overhead and $5,040,000 in fixed overhead. Actual results for the Michigan plant are an output of 8,700,000 units using 2,436,000 labor hours with a variable cost of $7,551,600 and fixed overhead cost of $4,800,000. The actual common fixed costs for the year were $6,252,000.

1. Compute the budgeted fixed cost per labor hour for the fixed overhead separately for each plant:

a. Excluding allocated common fixed costs

b. Including allocated common fixed costs

2. Compute the variable overhead spending variance and the variable overhead efficiency variance separately for each plant.

3. Compute the fixed overhead spending and volume variances for each plant:

a. Excluding allocated common fixed costs

b. Including allocated common fixed costs

4. Did Judy Jackson’s attempt to make the Michigan plant look better than the California plant by allocating common fixed costs work? Why or why not?

5. Should common fixed costs be allocated in general when variances are used as performance measures? Why or why not?

6. What do you think of Judy Jackson’s behavior overall?

Reference no: EM131464681

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