Question:
(Cost control evaluation) McNeal Concrete makes precast concrete steps for use with manufactured housing. The company had the following 2010 budget based on expected production of 6,400 units:
|
Standard Cost
|
Amount Budgeted
|
|
Direct material
|
$22.00
|
$140,800
|
|
Direct labor
|
12.00
|
76,800
|
|
Variable overhead
|
|
|
|
Indirect material
|
4.20
|
26,880
|
|
Indirect labor
|
1.75
|
11,200
|
|
Utilities
|
1.00
|
6,400
|
|
Fixed overhead
|
|
|
|
Supervisory salaries
|
|
80,000
|
|
Depreciation
|
|
30,000
|
|
Insurance
|
|
19,280
|
|
Total
|
|
$391,360
|
|
Cost per unit = $391,380 ÷ 6,400 = $61.15
|
|
Actual production for 2010 was 7,000 units, and actual costs for the year were as follows:
|
Direct material used
|
$161,000
|
|
Direct labor
|
84,600
|
|
Variable overhead
|
|
|
Indirect material
|
28,000
|
|
Indirect labor
|
13,300
|
|
Utilities
|
7,700
|
|
Fixed overhead
|
|
|
Supervisory salaries
|
82,000
|
|
Depreciation
|
30,000
|
|
Insurance
|
17,600
|
|
Total
|
$424,200
|
|
Cost per unit = $424,200 ÷ 7,000 = $60.60
|
|
The plant manager, Tanzi Palate, whose annual bonus includes (among other factors) 20 percent of the net favorable cost variances, states that he saved the company $3,850 [($61.15 - $60.60) X 7,000]. He has instructed the plant cost accountant to prepare a detailed report to be sent to corporate headquarters comparing each component's actual per-unit cost with the per-unit amounts in the preceding annual budget to prove the $3,850 cost savings.
a. Is the actual-to-budget comparison proposed by Palate appropriate? If his comparison is not appropriate, prepare a more appropriate comparison.
b. How would you, as the plant cost accountant, react if Palate insisted on his comparison? Suggest what alternatives are available to you.