Business Decision Case Porter Corporation has just hired Bill Harlow as its new controller. Al-

though Harlow has had little formal accounting training, he professes to be highly experienced,

having learned accounting the hard way in the field. At the end of his first months work, Harlow

prepared the following performance report:

PORTER CORPORATION

Performance Report

for the Month of June, 2015

Total Actual

Costs

Total Budgeted

Costs Variances

Direct material ............................ $216,630 $237,600 $20,970 F

Direct labor............................... 119,340 132,000 12,660 F

Variable overhead.......................... 63,000 66,000 3,000 F

Fixed overhead............................ 184,000 F

184,000

$582,970 $619,600 $36,630

In his presentation at Porters month-end management meeting, Harlow indicated that things

were going fantastically. The figures indicate, he said, that the firm is beating its budget in

all cost categories. This good news made everyone at the meeting happy and furthered Harlows

acceptance as a member of the management team.

After the management meeting, Susan Jones, Porters general manager, asked you, as an inde-

pendent consultant, to review Harlows report. Jones concern stemmed from the fact that Porter has

never operated as favorably as Harlows report seems to imply, and she cannot explain the apparent

significant improvement.

While reviewing Harlows report, you are provided the following cost and operating data for

June: Porter has a monthly normal capacity of 11,000 direct labor hours or 8,800 units of product.

Standard costs per unit for its only product are direct material, 3 pounds at $9 per pound; direct

labor, 1.25 hours at $12 per hour; and variable overhead rate per direct labor hour of $6. During

June, Porter produced 8,000 units of product, using 24,900 pounds of material costing $8.70 each,

10,200 direct labor hours at an average rate of $11.70 each, and incurred variable overhead costs of

$63,000 and fixed overhead costs of $184,000.

After reviewing Porters June cost data, you tell Harlow that his cost report contains a classic

budgeting error, and you explain how he can remedy it. In response to your suggestion, Harlow

revises his report as follows:

Total Actual

Costs

Total Budgeted

Costs Variances

Direct material ........................... $216,630 $216,000 $ 630 U

Direct labor.............................. 119,340 120,000 660 F

Variable overhead......................... 63,000 60,000 3,000 U

Fixed overhead........................... 184,000

184,000

$582,970 $580,000 $2,970 U

Harlows revised report is accompanied by remarks expressing regret at the oversight in the

original report.

Required

In your role as consultant,

a. Verify that Harlows actual cost figures are correct.

b. Identify and explain the classic budgeting error that Harlow apparently incorporated into his

original cost report.

c. Explain why Harlows revised figures could be considered deficient.

d. Further analyze Harlows revised variances, isolating underlying potential causal factors.

How do your analyses indicate bases for concern to management?