The Elon Company Had Great Difficulty in Controlling Overhead Costs

question 2

Essay

The Elon Company had great difficulty in controlling overhead costs. At a recent convention, the president heard about a control device for overhead costs known as a flexible budget and she has hired you to implement this budgeting program. After some effort, you develop the following cost formulas for the company's machining department. These costs are based on a normal operating range of 15,000 to 23,000 machine-hours per month:
$$\begin{array} { l l l } \text { Machine setup } & \$ 0.20 \mathrm { per } \text { machine-hour } \\\text { Lubricarts } & \$ 1.00 \text { er machine-hour plus } \$ 8,000 \text { per month } \\\text { Utilities } & \$ 0.70 \text { per machine-hour } \\\text { Indirect labor } & \$ 0.60 \text { per machine-hour plus } \$ 20,000 \text { per month } \\\text { Depreciation } & \$ 32,000 \text { per month }\end{array}$$
During March, the first month after your preparation of the above data, the machining department worked 18,000 machine-hours and produced 9,000 units of product. The actual costs of this production were:
$$\begin{array} { l r } \text { Machine set-up } & \$ 4,800 \\\text { Lubricarits } & 24,500 \\\text { Utilities } & 12,000 \\\text { Indirect labor } & 32,500 \\\text { Depreciation } & \underline{32,500} \\& \underline{\$ 106,300} \\\end{array}$$
The department had originally been budgeted to work 19,000 machine-hours during March.
Required:
Prepare a performance report for the machining department for the month of March including columns for the (a) actual results, (b) flexible budget, (c) flexible budget variance, (d) master budget, and (e) sales activity variance.

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Definitions:

Market Orientation

A business philosophy where the focus is on identifying and meeting the needs and wants of customers through product innovation and customer satisfaction.

Natural Monopolies

A market structure where a single firm can provide a good or service to an entire market at a lower cost than if there were multiple firms due to economies of scale.

ROI

Return on Investment, a performance measure used to evaluate the efficiency or profitability of an investment.

Marketing Concept

A business philosophy suggesting that the key to achieving organizational goals consists of the company being more effective than competitors in creating, delivering, and communicating customer value to its selected target markets.