Imperial Mills is a small flour company in the West. Claude Laurent became president in 2010. He is concerned with the ability of his production manager to control costs. To aid his evaluation, Laurent set up a standard-cost system. 

Standard costs were based on 2010 costs in several categories. Each 2010 cost was divided by 1,520,000 cwt (cwt means hundredweight, or 100 pounds), which was the volume of 2010 production, to determine a standard for 2011. 

At the end of 2011, Laurent compared actual results with the standards he established. Production was 1,360,000 cwt, and variances were as follows: 

Laurent was not surprised by the unfavourable variance in direct materials. After all, wheat prices in 2011 averaged 10 percent above those in 2010. But he was disturbed by the lack of control of fixed overhead. He called in the production manager and demanded an explanation. 

1. Prepare an explanation for the large unfavourable fixed overhead variance. 

2. Discuss the appropriateness of using one year’s costs as the next year’s standards.

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2011 Standard (per hundredweight) 2010 Cost (in thousands) Direct $1,824 $1.20 materials Direct labour 836 0.55 Variable 1,596 1.05 overhead Fixed overhead 2,432 1.60 Total $6,688 $4.40 Actual Standard Variance Direct materials $1,802 $1,632 $170 U Direct labour 735 748 13 F Variable overhead 1,422 1,428 6 F Fixed overhead 2,418 2,176 242 U Total $6,377 $5,984 $393 U