Question

Case (3) Data concerning manufacturing overhead for a Saudi Company are presented below. The Mixing Department is a cost center. An analysis of the overhead costs reveals that all variable costs are controllable by the manager of the Mixing Department and that 50% of supervisory costs are controllable at the department level. The flexible budget formula and the cost and activity for the months of July and August are as follows Flexible Budget Per Direct Labor Hour Actual Costs and Activity July August Direct labor hours 6,000 7,000 Variable Indirect materials SR3.50 SR 20,500 SR 25,100 Indirect labor 6.00 39,500 40,700 Factory supplies 1.00 7,600 8,200 Fixed Depreciation SR20,000 15,000 15,000 Supervision 25,000 23,000 26,000 Property taxes 10,000 12,000 12,000 Total costs SR117,600 SR127,000 Required (a) Prepare the responsibility reports for the Mixing Department for each month (1 mark). (b) Comment on the manager's performance in controlling costs during the two month period (1 mark).

Answer 1

Information Given -

The cost and activity for the months of July and August are as follows: -

		Actual Costs and Activity
		July	August
Direct labor hours	-	6000	7000
Overhead costs	-	-	-
Variable	-	-	-
Indirect materials	$3.50	$20500	$25100
Indirect labor	$6.00	$39500	$40700
Factory supplies	$1.00	$7600	$8200
Fixed	-	-	-
Depreciation	$20000	$15000	$15000
Supervision	$25000	$23000	$26000
Property taxes	$10000	$12000	$12000
Total costs		$117600	$127000

.

(a) -- Prepare the responsibility reports for the Mixing Department for each month.

Answer -

SAUDI COMPANY

Mixing Department

Manufacturing Overhead Cost Responsibility Report For the Months of July and August.

	July			August
Controllable Cost	Budget ($)	Actual ($)	Difference ($)	Budget ($)	Actual ($)	Difference ($)
Indirect materials	21000 [6000 hours * $3.50]	20500 [Given]	500 Favorable	24500 [7000 hours * $3.50]	25100 [Given]	600 Unfavorable
Indirect labor	36000 [6000 hours * $6]	39500 [Given]	3500 Unfavorable	42000 [7000 hours * $6]	40700 [Given]	1300 Favorable
Factory supplies	6000 [6000 hours * $1]	7600 [Given]	1600 Unfavorable	7000 [7000 hours * $1]	8200 [Given]	1200 Unfavorable
Supervision	12500 [25000*50%]	11500 [23000*50%]	1000 Favorable	12500 [25000*50%]	13000 [26000*50%]	500 Unfavorable
Total costs	75500	79100	3600 Unfavorable	86000	87000	1000 Unfavorable

.

(b) -- Comment on the manager's performance in controlling costs during the two month period.

Answer -

The manager did a better job of controlling costs in August ($1000 Unfavorable) than in July ($3600 Unfavorable).