Question

At the end of 2008, Cyril Fedako, CFO for Fedako Products, received a report comparing budgeted and actual production costs for the company’s plant.

Manufacturing Costs
Forest Lake Plant
Budget versus Actual 2008

Budget Actual Difference (Actual vs Budget)
Materials 3,000,000 3,300,000 300,000
Direct Labor 2,100,000 2,300,000 200,000
Supervisory salaries 375,000 400,000 25,000
Utilities 75,000 85,000 10,000
Machine maintenance 250,000 280,000 30,000
Depreciation of building 50,000 50,000 0
Depreciation of equipment 200,000 205,000 5,000
Janitorial 120,000 135,000 15,000
Total 6,170,000 6,755,000 585,000

His first thought was that costs must be out of control since actual costs exceed the budget by $585,000. However, he quickly recalled that the budget was set assuming a production level of 50,000 units. The Forest Lake plant actually produced 55,000 units in 2008.
Required
Given that production was greater than planned, should Cyril expect that all actual costs will be greater than budgeted? Which costs would you expect to increase and which costs would you expect to remain relatively constant? Cyril is extremely busy, which costs should Cyril concentrate on in his investigation of budget differences?

Answer 1

The analysis of expense gives following results:
a) The variable cost should change in proportion to the increase in production. Direct Material and direct labor are within limits, so no need for investigation.
b) Depreciation on building is fixed and on equipment is within the limits, so no need for investigation.
c) Supervisory salaries, Utilities, Machine maintenance and Janitorial has increased beyond budgets, needs to be properly investigated.