Case: Butler Products
A manufacturing company produces a large variety of products within the Butler family of products. They are produced in three finishing departments (A, B, and C), which have identical assembly operations but package the products differently for different lines of business.
Department A has the oldest equipment, which is in the last year of its depreciable life. Department B's equipment is about half depreciated. Department C's equipment is in the second year of its life.
The budget prepared for each department in 2010 included the following costs, volumes, and overhead rates (M denotes millions):
A B C
Expected number of units 73M 73 M 55 M
Fixed overhead
General expense $1.5 M $2.0 M $1.25 M
Rent $1.5 M $2.0 M $1.75 M
Depreciation $0.5 M $2.0 M $5.0 M
Variable overhead $150/machine hour $131/machine hour $150/machine hour
Machine rate 1,140 units/hour 1,140 units/hour 1,140 units/hour
Direct materials $0.50/unit $0.52/unit $0.55/unit
Direct labor $0.15/unit $0.15/unit $0.135/unit
The general expense portion of the overhead is set by each department at the beginning of the year for training, capital items under $2,500, and other department needs. The rent charged to each department is determined by the age and the structure of the building in which the department operates. In general, machines that are shut down because of volume decreases are not removed, so rent charges do not decrease with volume.
The packaging machines in each department require different amounts of maintenance (variable overhead). In department A, the maintenance is higher because of older drive and logic systems. In department C, it is higher due to start-ups costs that should decrease with time.
Direct materials costs depend on the products each department has been designated to run and the age of the equipment. They are outside the control of the department.
In 2010 Butler sales softened and not all of the capacity in departments A, B, and C is needed in 2011. Some capacity will be eliminated in one of the departments.
A B C
Actual units packaged 67 M 73 M 49 M
Direct labor per unit $0.15 $0.15 $0.135
Direct materials per unit $0.50 $0.52 $0.55
Actual overhead charge $12.7 M $14.7 M $14.3M
Actual machine hours 58,772 64,035 42,982
Required:
(a) Calculate all variances. Which department best manages the overhead that is within its control?
(b) How would you recommend that the division distribute the fixed overhead that is not controllable by the departments?
(c) Given the reduced demand, which department should reduce volume? Why?