Colorado Springs Manufacturing Facility

Cost Control Report

December 21 Preliminary Draft

F

	Flexible Budget	Actual Results	Spending Variances
Labor Hours	9,000	9,000
Direct Labor	$162,000	$164,600	$2,600 U
Power	2,700	2,950	250U
Supplies	28,800	29,700	900 U
Equipment Depreciation	226,500	228,300	1,800 U
Supervisory Salaries	189,000	187,300	1,700 F
Insurance	23,000	23,000	0
Industrial engineering	160,000	154,000	6,000 F
Factory Building Lease	46,000	46,000	0
Total Expense	$838,000	$835,850	$2,150 F

Tab Kapp, the general manager at the Colorado Springs facility, asked to see a copy of the preliminary draft

report. Prating carried a copy of the report to Kapp%u2019s office where the following discussion took place:

Kapp: Wow! Almost all of the variances on the report are unfavorable. The only favorable variances are for

supervisory salaries and industrial engineering. How did we have an unfavorable variance for depreciation?

Prating: Do you remember that milling machine that broke down because the wrong lubricant was used

by the machine operator?

Kapp: Yes.

Prating: We couldn%u2019t fix it. We had to scrap the machine and buy a new one.

Kapp: This report doesn%u2019t look good. I was raked over the coals last year when we had just a few

unfavorable variances.

Prating: I%u2019m afraid the final report is going to look even worse.

Kapp: Oh?

Prating: The line item for industrial engineering on the report is for work we hired Sanchez Engineering to

do for us. The original contract was for $160,000, but we asked them to do some additional work that was

not in the contract. We have to reimburse Sanchez Engineering for the costs of that additional work. The

$154,000 in actual costs that appears on the preliminary draft report reflects only their billings up through December 21. The last bill they had sent us was on November 28, and they completed the project just last

week. Yesterday I got a call from Mary Jurney over at Sanchez and she said they would be sending us

a final bill for the project before the end of the year. The total bill, including the reimbursements for the

additional work, is going to be . . .

Kapp: I am not sure I want to hear this.

Prating: $176,000 .

Kapp: Ouch!

Prating: The additional work added $16,000 to the cost of the project.

Kapp: I can%u2019t turn in a report with an overall unfavorable variance! They%u2019ll kill me at corporate

headquarters. Call up Mary at Sanchez and ask her not to send the bill until after the first of the year.

We have to have that $6,000 favorable variance for industrial engineering on the report.

Required:

What should Lance Prating do? Explain.