Author Question: Equipment is listed as an asset because it is used up in a relatively long period of time. ... (Read 55 times)

Anajune7 · **on:** Jul 6, 2018

Equipment is listed as an asset because it is used up in a relatively long period of time.
Indicate whether the statement is true or false

Question 2

(40 50 minutes) Overhead variances, ethics

Hartmann Company uses standard costing. The company has two manufacturing plants, one in Georgia and the other in Alabama. For the Georgia plant, Hartmann has budgeted annual output of 2,000,000 units. Standard labor-hours per unit are 0.50, and the variable overhead rate for the Georgia plant is 3.30 per direct labor-hour. Fixed overhead for the Georgia plant is budgeted at
2,400,000 for the year.
For the Alabama plant, Hartmann has budgeted annual output of 2,100,000 units with standard labor-hours also 0.50 per unit. However, the variable overhead rate for the Alabama plant is 3.10 per hour, and the budgeted fixed overhead for the year is only 2,205,000.
Firm management has always used variance analysis as a performance measure for the two plants and has compared the results of the two plants.
Tom Saban has just been hired as a new controller for Hartmann. Tom is good friends with the Alabama plant manager and wants him to get a favorable review. Tom suggests allocating the firm's budgeted common fixed costs of 3,150,000 to the two plants, but on the basis of one-third to the Alabama plant and two- thirds to the Georgia plant. His explanation for this allocation base is that Georgia is a more expensive state than Alabama.
At the end of the year, the Georgia plant reported the following actual results: output of 1,950,000 using 1,020,000 labor-hours in total, at a cost of 3,264,000 in variable overhead and 2,440,000 in fixed overhead.

Actual results for the Alabama plant are an output of 2,175,000 units using 1,225,000 labor-hours with a variable cost of 3,920,000 and fixed overhead cost of 2,300,000. The actual common fixed costs for the year were 3,075,000.

Required:
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 Tom Saban's attempt to make the Alabama plant look better than the Georgia 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 Tom Saban's behavior overall?

Viet Thy · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

T

Answer to Question 2

1. a. Georgia plant:
Expected output in units 2,000,000
Direct labor hours per unit 0.50
Total budgeted labor hours 1,000,000

Budgeted fixed OH rate = 2,400,000 / 1,000,000 DLH = 2.40 per DLH

Alabama plant:
Expected output in units 2,100,000
Direct labor hours per unit 0.50
Total budgeted labor hours 1,050,000

Budgeted fixed OH rate = 2,205,000 / 1,050,000 DLH = 2.10 per DLH

b. Allocation of common fixed costs:
To Georgia: 3,150,000 2/3 = 2,100,000
To Alabama: 3,150,000 1/3 = 1,050,000

Georgia plant:

Budgeted fixed OH rate = (2,400,000 + 2,100,000) / 1,000,000 DLH = 4.50 per DLH

Alabama plant:

Budgeted fixed OH rate = (2,205,000 + 1,050,000)/ 1,050,000 DLH = 3.10 per DLH

2. Variable overhead variances:

Georgia plant:

Actual Actual hours Budgeted input allowed for
Variable Overhead Budgeted rate Actual output Budgeted rate (1,020,000 3.20) (1,020,000 3.30) (1,950,000 0.50 3.30)
3,264,000 3,366,000 3,217,500

102,000 F 148,500 U
Spending variance Efficiency variance

Alabama plant:

Actual Actual hours Budgeted input allowed for
Variable Overhead Budgeted rate Actual output Budgeted rate
(1,225,000 3.20) (1,225,000 3.10) (2,175,000 0.50 3.10)
3,920,000 3,797,500 3,371,250

122,500 U 426,250 U
Spending variance Efficiency variance

3. Fixed overhead variances

a. Excluding the allocated common costs

Georgia plant:

Actual Static Budget Budgeted input allowed for
Fixed Overhead Fixed Overhead Actual output Budgeted Rate
(1,950,000 0.50 2.40)
2,440,000 2,400,000 2,340,000

40,000 U 60,000 U
Spending variance Production-volume variance

Alabama plant:

Actual Static Budget Budgeted input allowed for
Fixed Overhead Fixed Overhead Actual output Budgeted Rate
(2,175,000 0.50 2.10) 2,300,000 2,205,000 2,283,750

95,000 U 78,750 F
Spending variance Production-volume variance

b. Including allocated common costs

Georgia plant:

Actual Static Budget Budgeted input allowed for
Fixed Overhead Fixed Overhead Actual output Budgeted Rate
2,440,000 + (2/3 3,075,000) (2,400,000 + 2,100,000) (1,950,000 0.50 4.50)
4,490,000 4,500,000 4,387,500

10,000 F 112,500 U
Spending variance Production-volume variance

Alabama plant:

Actual Static Budget Budgeted input allowed for
Fixed Overhead Fixed Overhead Actual output Budgeted Rate
2,300,000 + (1/3 3,075,000) (2,205,000 + 1,050,000) (2,175,000 0.50 3.10)
3,325,000 3,255,000 3,371,250

70,000 U 116,250 F
Spending variance Production-volume variance

4. Tom Saban's attempt did not fully work. Even though he tried to allocate a significantly larger amount of common cost to the Georgia plant than to the Alabama plant, the cost becomes part of the fixed overhead rate and thus will only cause a large unfavorable spending variance for the Georgia plant if the cost itself is much larger than expected. Because the actual common costs were lower, the result was actually to shift Georgia's spending variance from unfavorable to favorable Also, the spending variance for the Alabama plant is already larger than that of the Georgia plant, and the gap between them only increases when the common fixed costs are added to both plants. That said, the inclusion of the common fixed cost does exacerbate the impact of the underproduction by Georgia relative to budget (via the higher unfavorable production volume variance) while increasing the favorable volume variance for Alabama.

5. Common fixed costs should not be allocated to units that are being evaluated for performance because common fixed costs are not controllable by those units. Thus, the units should not be responsible for such costs.

6. Tom Saban's behavior is not ethical. He attempted to make his friend better off by manipulating costs and overhead rates, rather than focusing on which cost system would provide the best measure of relative performance among the divisions.