Problem

One of the variable production costs is the cost of steel. The standards for steel purchase prices and usage as set at the beginning of 2016 were: Standard price of steel $25.00 per pound Standard quantity of steel per car 100 pounds per carData on actual steel purchases for 2016 were: Actual cost of steel purchased and used $28,700,000 Actual pounds of steel purchase and used 1,210,000 pounds Recall that budgeted production for the year was 10,000 cars, while actual production was 11,000.

Required

1. Were total steel costs for 2016 greater or less than expected? By how much?

2. How much of a difference should have been observed due to the production level being higher than expected? How much difference is still unexplained?

3. The purchasing department is responsible for efficiently purchasing as much steel as the production department needs. What was the average price per pound at which steel was purchased? Did the purchasing department perform well?

4. The production department is responsible for efficiently using the steel to produce the necessary level of output. What was the average number of pounds of steel used to produce each car in 2016? Did the production department perform well?

5. At the end of the year a cash bonus of 5% of performance above expectations is split among the members of the relevant departments. Performance above expectations is defined in terms of impact on total profits. What was the impact of the production department's production activities on the company's overall profits? What was the impact of the purchasing department's activities on the company's overall profits? Which department if any will receive a bonus? What size will that bonus pool be?

6. Are there any caveats in the performance evaluation mechanism used in question 5?