Tom Kemper is the controller of the Wichita manufacturing facility of Prudhom Enterprises, Inc. The annual cost control report is one of the many reports that must be filed with corporate headquarters and is due at corporate headquarters shortly after the beginning of the New Year. Kemper does not like putting work off to the last minute, so just before Christmas, he prepared a preliminary draft of the cost control report. Some adjustments would later be required for transactions that occur between Christmas and New Year's Day. A copy of the preliminary draft report, which Kemper completed on December 21, follows: Wichita Manufacturing Facility Cost Control Report December 21 Preliminary Draft Actual Flexible Sponding Results Budget Variances Labor-hours 18.000 18,000 Supplies Direct labor Power Equipment depreciation $ 326,000 $324,000 $ 2,000 U 19,750 18,000 1,750 U 105,000 99,000 6,000 U 343,000 332,000 11,000 U Supervisory salaries 273,000 275,000 2,000 F Insurance 37,000 37,000 Industrial engineering 189,000 210,000 0 21,000 F Factory building lease 60,000 60,000 0 Total expence $1,352,750 $1,355,000 $2,250 F Melissa Ilianovitch, the general manager at the Wichita facility, asked to see a copy of the preliminary draft report. Kemper carried a copy of the report to her office where the following discussion took place: Ilianovitch: Ouch! 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? Kemper: Do you remember that milling machine that broke down because the machine operator used the wrong lubricant? Ilianovitch: Yes. Kemper: We could not fix it. We had to scrap the machine and buy a new one. Ilianovitch: This report does not look good. I was raked over the coals last year when we had just a few Unfavorable variances. Kemper: I am afraid the final report is going to look even worse. Ilianovitch: Oh?