Question

Expand Your Critical Thinking 24-2 (Essay)

Ana Carillo and Associates is a medium-sized company located near a large metropolitan area in the Midwest. The company manufactures cabinets of mahogany, oak, and other fine woods for use in expensive homes, restaurants, and hotels. Although some of the work is custom, many of the cabinets are a standard size.

One such non-custom model is called Luxury Base Frame. Normal production is 1,000 units. Each unit has a direct labor hour standard of 5 hours. Overhead is applied to production based on standard direct labor hours. During the most recent month, only 900 units were produced; 4,500 direct labor hours were allowed for standard production, but only 4,000 hours were used. Standard and actual overhead costs were as follows.

		Standard (1,000 units)			Actual (900 units)
Indirect materials		$  12,000			$  12,300
Indirect labor		43,000			51,000
(Fixed) Manufacturing supervisors salaries		22,500			22,000
(Fixed) Manufacturing office employees salaries		13,000			12,500
(Fixed) Engineering costs		27,000			25,000
Computer costs		10,000			10,000
Electricity		2,500			2,500
(Fixed) Manufacturing building depreciation		8,000			8,000
(Fixed) Machinery depreciation		3,000			3,000
(Fixed) Trucks and forklift depreciation		1,500			1,500
Small tools		700			1,400
(Fixed) Insurance		500			500
(Fixed) Property taxes		300			300
Total		$144,000			$150,000

(e)

Discuss causes of the overhead variances. What can management do to improve its performance next month?

Answer 1

The company has consumed 4000 labor hours, which is less comparing the standard labor hours allowed for 900 units, i.e, 4500 labor hours. Hence, the company is efficient in the method of production used.

So, the main component for the unfavorable variances are the rate variances. The prices of the material, labor, and other OH has been considerably increased.

How to Improve?
The management can enter increase the production, so that it could acquire more quantities and labor at some discounted prices. The company may enter into a long-term contract with the suppliers and ensure that the burden of price escalations is largely with the supplier.