Kilgore Precision Machining (KPM) has a highly automated manufacturing process f
ID: 2468788 • Letter: K
Question
Kilgore Precision Machining (KPM) has a highly automated manufacturing process for producing a
variety of auto parts. Through the use of computer-aided manufacturing and robotics, the company has
reduced its labor costs to only 5% of total manufacturing costs. Consequently, the company does not
account for labor as a separate item but instead accounts for labor as part of overhead.
Consider a part used in antilock braking systems. The static budget for producing 750 units in
March 20X1 is as follows:
C H A P T E R 8
*3 lb/unit * $8/lb * 750 units.
Direct materials $18,000*
Overhead
Supplies 1,875
Power 1,310
Rent and other building services 2,815
Factory labor 1,500
Depreciation 4,500
Total manufacturing costs $30,000
Direct materials $21,840*
Overhead
Supplies 2,132
Power 1,612
Rent and other building services 2,775
Factory labor 1,618
Depreciation 4,500
Total manufacturing costs $34,477
Supplies and power are variable, and the other overhead items are ! xed costs.
Actual costs in March 20X1 for producing 900 units of the brake part were as follows:
*KPM purchased and used 2,800 pounds of materials at $7.80 per pound.
1. Compute (a) the direct-materials price and quantity variances and (b) the flexible-budget variance
for each overhead item.
2. Comment on the way KPM accounts for and controls factory labor.
Explanation / Answer
1a. Direct material price variance = actual quantity*actual price - actual quantity * standard price
actual quantity = 2800 pounds of materials. actual price = $7.80 per pound. standard price = $8 per pound.
Direct material price variance = 2800 pounds*$7.80 - 2800 pounds - $8 = $560 (favorable)
direct material quantity variance = actual quantity*standard price - standard quantity*standard price
standard quantity = 750*3 = 2250 pounds.
Thus variance = 2800*8 - 2250*8 = $4,400 (unfavorable).
b. For flexible budget, the revenue and expenses will be calculated based on the actual level of production, but using base of the static budget. Actual activity = 900 units. Budgeted activity = 750 units.
Budgeted supplies = $1875. Supplies per unit = 1875/750 (supplies cost/budgeted units)= $2.50 per unit. Thus supplies for 900 units will be in flexible budget as: 900*2.50 = 2250.
Power is also variable. Thus, power per unit = 1310/750 = (power cost/budgeted units) = $1.75 per unit. Power for 900 units for flexible budget will be 900*1.75 = $1572.
All other costs are fixed and hence in the flexible budget, the amount of fixed costs will be the same as variable costs. For example, rent is a fixed cost. Its amount in the static budget is $2815 and the same amount will be there in the flexible budget.
2. Factory labor is shown as a fixed cost. This is not a correct approach. Eeven though the amount of labor is relatively small, it is still a manufacturing overhead and should be shown as a separate item under the heading manufacturing overheads. It cannot be considered as a part of administrative overheads. Factory labor is still being used in manufacturing, although to a very small extent, and should be part of manufacturing overheads.
Actual Flexible Variance Units 900.00 900.00 Variable costs Supplies 2,132.00 2,250.00 -118.00 Favorable Power 1,612.00 1,572.00 40.00 Unfavorable Fixed costs: Rent 2,775.00 2,815.00 -40.00 Favorable Labor 1,618.00 1,500.00 118.00 Unfavorable Depreciation 4,500.00 4,500.00 0.00 no varianceRelated Questions
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