Question

PROBLEM 1-5. Performance Reports: 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 in Forest Lake, Minnesota:
Manufacturing Costs
Forest Lake Plant Budget versus Actual 2008
	Budget		Actual		Difference
Materials	$3,000,000		$33,000,000		$300,000
Direct labor	2,100,000		23,000,000		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.
a. 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?
b. Cyril is extremely busy as the company has six other plants. Therefore, he cannot spend time investigating every departure from the budget.
With this in mind, which costs should Cyril concentrate on in his investigation of budget differences?

Answer 1

(a) I would expect variable costs to increase and fixed costs to remain constant, variable costs would include: Materials, direct labor and utilities
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(b)

Variable Costs (materials, labor and utilities costs) are adjusted for the new level of production while fixed costs remain constant. Cyril can set up a percentage limit below which the costs would not be investigated. Suppose the limit is set at 5%, then the costs to be investigated are Supervisory Salaries, Machine maintenance and Janitorial costs since these deviate by the higher percentage. Having said that, I would still recommend that any deviations no matter how minimal they are should be investigated