Frank Western, supervisor of the machining department of Freemont 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.

?I just can?t understand all the red ink,? said Western to Sarah Mason, 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 unfavourable, and I don?t even know why.?

The budget for the machining department had called for production of 14,000 units last month, which is equal to a budgeted activity level of 35,000 machine-hours (at a standard time of 2.5 hours per unit). Actual production in the machining department for the month was 16,000 units.

Required:

1. Evaluate the overhead performance report given above, and explain why the variances are all unfavourable.

2. Prepare a new overhead performance report that will help Western?s superiors assess efficiency and cost control in the machining department.

3. Would the supplies stolen out of the warehouse be included as part of the variable overhead spending variance or as part of the variable overhead efficiency variance for the month? Explain.

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FREEMONT COMPANY Performance Report-MachIning Department Cost Formula 6. (per machine- Actual hour) Budget Varlance 9 Machine-hours 35.000 38.000 10 | 11 Variable overhead costs: 12 Utilities $ 1,700 0.40 $ 15,700 $ 14,000 13 Indirect labour 2.30 86,500 80,500 6,000 14 Supplies 0.60 26,000 21,000 5,000 15 1.20 42.000 Maintenance 44,900 2,900 16 Total variable overhead cost $ 15.600 $173.100 $157.500 4.50 17 ш %24 4. 00 18 Fixed overhead cost: Supervision 38,000 19 38,000 20 Maintenance 92,400 92,000 400 21 Depreciation 80,000 80.000 22 Total fixed overhead cost 210.000 210.400 400 23 Total overhead cost $ 383,500 $ 367,500 $ 16,000 24