KARENVILLE Corporation manufactures and sells product. A standard cost system has been used for years as an aid in planning and controlling their operations. The company used it for establishing budget, controlling costs, simplifying costing procedures and cost reports. Using the standard cost system, the standard cost per unit of product is: The factory overhead cost per unit was calculated from the following annual overhead cost budget for a 60,000-unit volume: Variable factory overhead cost: Indirectlabor(30,000hoursat$4)Supplies(oil60,000gallonsat$.50)AllocatedvariableservicedepartmentcostTotalvariablefactoryoverheadcost$120,00030,00030,000$180,000 Fixed factory overhead cost: \begin{tabular}{lr} Supervision & $27,000 \\ Depreciation & 45,000 \\ Other fixed costs & 15,000 \\ Total fixed factory overhead cost & $87,000 \\ \hline \end{tabular} Total budgeted annual factory overhead cost for 60,000 units $267,000 The charges to the Manufacturing Department for November, when 5,000 units were produced, were as follows: Different managers are usually responsible for buying and for using inputs. The company has divided its responsibilities so that the Purchasing Department is responsible for the price at which materials and supplies are purchased, while the Production Department is responsible for the quantities of materials used to make products. Mr. Teddy McGee, the Purchasing Department manager who normally buys about the same quantity of plastic as is used in production during a month. He knows how to control prices and achieved it by obtaining several quotations from different suppliers, buying in economical lots, taking advantage of cash discounts and selecting the most economical means of delivery. In November, 5,200 pounds were purchased at a best price of $2.10 per pound. Ms. Nadine Gibson, the Production Department manager regularly check the materials to be used during the period. If the materials are of substandard quality, the cause may be the purchase requisition informing the purchasing department of the quality needed. If the material purchased vary from the purchase requisition specification, she directly informed that the cause was in the purchasing department. Also, she performs the timekeeping function and, at various times, an analysis of factory overhead and direct labor variance has shown that the manager has deliberately misclassified labor hours (for example, direct labor hours might be classified as indirect labor hours and vice versa), so that only one of the two labor variances is unfavorable. For her, it is not economically feasible to hire a separate timekeeper. Mr. Geoff Lancaster the newly hired controller at KARENVILLE Corporation was disturbed by what he had discovered when he ran across the reports. At first, he do not want to judge Ms. Gibson's performance and he would like to listen to Ms. Gibson's explanations that is why he decided to call and ask her with the following questions: Mr. Lancaster: Hi Ms. Gibson! Good morning. This is Geoff. Ms. Gibson: Oh Geoff! Good morning too. I heard you are the newly hired controller. Mr. Lancaster: Yes. I am happy and proud to be part of your prestigious company. Ms. Gibson: Oh great, welcome. Mr. Lancaster: Do you also perform the timekeeping function aside from being the Production Department manager? Ms. Gibson: Yes! I always do. Mr. Lancaster: I'm curious about the favorable labor variances. I ran across the report and I observed there was misclassification of the labor hours for the last three quarters and the reason why you came up with favorable labor differences. Ms. Gibson: Oh yes! Since you are a newly hired controller, I want you to know that for so many years, I had followed a practice of saving favorable variances and using it to create a nice smooth pattern of growing profits. Mr. Lancaster: Do you deliberately misclassified labor hours? Ms. Gibson: Listen Geoff...I am the production manager and I am also accountable for any labor variances affected by the mix of skill levels assigned to work task, level of employee motivation, quality of production supervision and the quality of training provided to employees. I think because of my experience, I have the adequate knowledge to do the 1. Calculate these variances from the standard costs data given: a. Materials purchase price variance. b. Materials quantity variance. c. Direct labor rate variance. d. Direct labor efficiency variance. e. Factory overhead controllable variance, analyzed for each expense classification. 2. Explain whether the division of responsibilities should solve the conflict between prices and quantity variances. 3. Prepare a report that details the factory overhead budget variance. The report, which will be given to the Manufacturing Department Manager. It should display only that part of the variance that is the manager's responsibility and should highlight information useful to manager in evaluating department performance and in considering corrective action. 4. Suggest a solution to the company's problems involving the classification of labor hours. What should Mr. Geoff Lancaster do in this situation