Harmony Industries Inc. is a small manufacturer of electronic musical instruments.

The plant manager received the following variable factory overhead report for the period:

The plant manager is not pleased with the $29,800 unfavorable variable factory overhead controllable variance and has come to discuss the matter with the controller. The following discussion occurred:
Plant Manager: I just received this factory report for the latest month of operation. I’m not very pleased with these figures. Before these numbers go to headquarters, you and I will need to reach an understanding.
Controller: Go ahead, what’s the problem?
Plant Manager: What’s the problem? Well, everything. Look at the variance.
It’s too large. If I understand the accounting approach being used here, you are assuming that my costs are variable to the units produced. Thus, as the production volume declines, so should these costs. Well, I don’t believe that these costs are variable at all. I think they are fixed costs. As a result, when we operate below capacity, the costs really don’t go down at all. I’m being penalized for costs I have no control over at all. I need this report to be redone to reflect this fact. If anything, the difference between actual and budget is essentially a volume variance. Listen, I know that you’re a team player. You really need to reconsider your assumptions on this one.
If you were in the controller’s position, how would you respond to the plantmanager?

Transcribed Image Text:

Budgeted Variable Factory Overhead at Actual Production Controllable Actual Indirect factory wages Power and light Supplies $100,800 38,000 21,000 5159,800 Variance $28,800 U 2,000 F 3,000 U $29,800 U 72,000 40,000 18,000 Total $130,000 Actual units produced: 15,000 (75% of practical capacity)