PROBLEM 9-23A Overhead Performance Report (LO2, LO4) CHECK FIGURE (2) Total variance: $8,900 F Debra Herman, supervisor of the Assembly Department for Greenlake Company was visibly upset after being reprimanded for his department’s poor performance over the prior month. The department’s performance report is given below: Greenlake Industries Performance Report—Assembly Department Cost Formula (per machine-hour) Actual Budget Variance Machine-hours 12,000 10,000 Variable overhead costs: Utilities $1.30 $ 15,800 $ 13,000 $ 2,800 U Indirect labor 2.90 33,500 29,000 4,500 U Supplies 0.80 13,200 8,000 5,200 U Maintenance 2.60 26,700 26,000 700 U Total variable overhead cost $7.60 89,200 76,000 13,200 U Fixed overhead costs: Supervision 84,000 84,000 0 Maintenance 98,200 97,500 700 U Depreciation 70,000 70,000 0 Total fixed overhead cost 252,200 251,500 700 U Total overhead cost $341,400 $327,500 $13,900 U “I just can’t understand all the red ink,” said Debra Herman to Keith Johnson, supervisor of another department. “When the boss called me in, I thought he was going to give me a pat on the back because I know for a fact that my department worked more efficiently last month than it has ever worked before. Instead, he tore me apart. I thought for a minute that it might be over the supplies that were stolen out of our warehouse last month. But they only amounted to a couple of thousand dollars, and just look at this report. Everything is unfavorable, and I don’t even know why.” The budget for the Assembly Department had called for production of 2,000 units last month, which is equal to a budgeted activity level of 10,000 machine-hours (at a standard time of 5.0 hours per unit). Actual production in the Assembly Department for the month was 2,600 units. Required: 1. Evaluate the overhead performance report given above and explain why th

1. The company is using a static budget approach, and is comparing budgeted performance at one level of activity to actual performance at a higher level of activity. This mismatching of activity levels is why the variable overhead variances are all unfavorable. The report in this format is not useful for measuring either operating efficiency or cost control. The only accurate piece of information it gives is that the department worked more than the 10,000 machine-hours budgeted for the month. It does not tell whether the actual output for the month was produced efficiently, nor does it tell whether overhead spending has been controlled during the month.

2. See the next page for the performance report.

3. The stolen supplies would be part of the variable overhead spending variance for the month. Unlike the price variance for materials and the rate variance for labor, the spending variance measures both price and quantity (waste, theft) elements. This is why the variance is called a “spending” variance; total spending can be affected as much by waste or theft as it can be by greater (or lesser) prices paid for items.

2. / Greenlake Industries
Performance Report—Assembly Department
Budgeted machine-hours / 10,000
Actual machine-hours / 12,000
Standard machine-hours / 13,000 / *
Overhead Costs / Cost Formula per MH / (1)
Actual Costs Incurred / (2)
Flexible Budget Based on 12,000 MHs / (3)
Flexible Budget Based on 13,000 MHs / Total Variance (1) – (3) / Spending Variance (1) – (2) / Efficiency Variance (2) – (3)
Variable costs:
Utilities / $1.30 / $15,800 / $15,600 / $16,900 / $1,100 / F / $200 / U / $1,300 / F
Indirect labor / 2.90 / 33,500 / 34,800 / 37,700 / 4,200 / F / 1,300 / F / 2,900 / F
Supplies / 0.80 / 13,200 / 9,600 / 10,400 / 2,800 / U / 3,600 / U / 800 / F
Maintenance / 2.60 / 26,700 / 31,200 / 33,800 / 7,100 / F / 4,500 / F / 2,600 / F
Total variable cost / $7.60 / 89,200 / 91,200 / 98,800 / 9,600 / F / $2,000 / F / $7,600 / F
Fixed costs:
Supervision / 84,000 / 84,000 / 84,000 / 0
Maintenance / 98,200 / 97,500 / 97,500 / 700 / U
Depreciation / 70,000 / 70,000 / 70,000 / 0
Total fixed cost / 252,200 / 251,500 / 251,500 / 700 / U
Total overhead cost / $341,400 / $342,700 / $350,300 / $8,900 / F

*2,600 units × 5.0 MHs per unit = 13,000 MHs