Hartman Company uses standard costing. The company has two manufacturing plants,

Question

Hartman Company uses standard costing. The company has two manufacturing plants, one in Georgia and the other in Alabama. For the Georgia plant, Hartman has budgeted an annual output of 2,000,000 units. Standard labor hours per unit are 0.5 and the variable overhead rate for the Georgia plant is $3.30 per direct labor hour. Fixed Overhead for the Georgia plant is $2,400,000 for the year.

For the Alabama plant, Hartman has budgeted an annual output of 2,100,000 units. This plants standard labor hours are also 0.5. However the variable overhead rate for the Alabama plant is $3.10 per direct labor hour. The budgeted fixed overhead is $2,205,000 for the year.

Firm management has always used variance analysis as a performance measure for the two plants and has compared the results of the two plants.

Tom Saban has just been hired as the new controller for Hartman. Tom is good friends with the Alabama plant manager and wants to give him a favorable review. Tom suggests allocating the firm's budgeted common fixed costs of $3,150,000 to the two plants, but on the basis of 1/3 to the Alabama plant and 2/3 to the Georgia plant. His explanation for this allocation is that Georia is a more expensive state than Alabama.

At the end of the year, the Georgia plant reported the following results: output of 1,950,000 using 1,020,000 labor-hours in total, at a cost of $3,264,000 in varibale overhead and $2,440,000 in fixed overhead.

The actual results for the Alabama plant are output of 2,175,000 units using 1,225,000 labor-hours in total with a variable cost of $3,920,000 and a fixed overhead cost of $2,300,000. The actual common fixed costs for the year were $3,075,000

1. Compute the budgeted fixed cost per labor-hour for fixed overhead seperately for each plant:

a. excluding allocated common fixed costs

b including allocated common fixed costs

2. Compute the varible overhead spending variance and the variable overhead effiency variance seperately for each plant.

3. Compute the fixed overhead spending and volume variances for each plant:

a. excluding allocated common fixed costs

b. including allocated common fixed costs

4. Did Tom Saban's attempt to make the Alabama plant look better than the Georgia plant by allocating common fixed costs work? Why or why not?

5. Should common fixed costs be allocated in general when variances are used as performance measures? Why or why not?

6. What do you think of Tom's overall behavior?

Explanation / Answer

1)

Budgeted fixed cost per labor hour            Georgia                   Albama

                                                               2,400,000                          2,205,000

                                                               2,000,000                          2,100,000

                                                          = 1.2 per hour                       $1.05 per hour

With common cost

$3,150,000                                  2,100,000(2/3)                    (1,050,000)1/3

b)                                                $4,500,000                            3,255,000

                                                      2,000,000                          2,100,000        

                                                  =$2.25                                      = $1.55

2)Variable spending variance

(actual overhead rate - Standard overhead rate) Actual hours worked

G               = (3.2 - 3.3 ) 1,020,000    = 102,000(F)

A               = (3.2 - 3.1) 1,225,000     = 122,500(U)

Variable overhead efficiency variance

(Actual hours - Standard hours ) Standard overhead rate

G = (1,020,000 - .5 *1,950,000) 3.3    = 1,48,500 (U)

A = (1,225,000 - .5*2,175,000) 3.10   = 426,250 (U)

3) Fixed spending variance

Actual fixed overhead - Budgeted fixed overhead

G = 2,440,000 - 2,400,000          = 40,000 (U)

A = 2,300,000 - 2,205,000          = 95,000(U)

including common fixed cost

G = 4,490,000 - $4,500,000       = 10,000(F)

A = 3,325,000 - 3,255,000        = 70,000(U)

Fixed overhead volume variance

(actual labor hours - Budgeted labor hours ) Budgeted cost per hour

G = (1,020,000 - 1,000,000 ) 1.2        = 24,000(U)

A = (1,225,000 - 1,050,000)1.05        = 183,750(U)

including common fixed cost

G = (1,020,000 - 1,000,000)2.25          = 45,000(u)

A = (1,225,000 - 1,050,000)1.55          = 271,250(U)

4) No because we see all the variances are adverse and also more than the Georgia Plant

5)General Fixed costs should bot be allowed for performance measure as these costs do not belong to any specific plant

Budgeted fixed cost per labor hour            Georgia                   Albama

                                                               2,400,000                          2,205,000

                                                               2,000,000                          2,100,000

                                                          = 1.2 per hour                       $1.05 per hour

With common cost

$3,150,000                                  2,100,000(2/3)                    (1,050,000)1/3

b)                                                $4,500,000                            3,255,000

                                                      2,000,000                          2,100,000        

                                                  =$2.25                                      = $1.55

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