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Cost Centers

The production manager for The Unknown Comic, Inc. would be a manager of a cost center because the relationship between costs of direct material, direct labor, and variable factory overhead and the end product are well defined. This manager would only be responsible for costs that they can exert some control over. The production manager would have no control over product sales, selling and administrative expenses and would not be involved in decisions related to the economic resources of the company.

We would use a portion of our flexible budget production report to prepare the production department responsibility report. The production department responsibility report is shown below:

The Unknown Comic, Inc.
Production Department Responsibility Report
For year ended December 31, 2017
-	Actual	-	-	Flexbile Budget
-	6,300 units	Variance	-	6,300 units
Variable costs	-	-	-	-
Direct materials	$22,785	$4,185	U	$18,600
Direct Labor	$39,060	$3,100	F	$42,160
Factory Overhead	$7,595	$155	U	$7,440
Total manufacturing costs	$69,440	$1,240	U	$68,200
-	-	-	-	-

The variance analysis for the company (from a previous lesson) provided the information related to the production department:

Direct Materials

For direct materials, we spent $4,185 more than expected. Of this amount:

$3,255 was due to the fact that the price of materials was higher than expected. We expected to pay $3.00 per pound but ended up spending $3.50.
$930 was due to the fact that more material was used than expected. We expected to use 6,200 lbs but ended up using 6,510 lbs.

Why did the price of the materials change? Was this outside the control of the production manager? What caused the company to use 310 lbs. more material than expected? Was this an efficiency issue or perhaps a quality of material issue?

Direct Labor

For direct labor, we spent a total of $3,100 less than expected. Of this amount:

$2,170 more was spent due was due to the fact that the actual cost of direct labor per hour, $18 was higher than the estimated cost per hour, $17.
$5,270 was saved because we needed fewer labor hours than expected to produce the units. We expected to use 2,480 hours but ended up using only 2,170 hours.

Why did the cost of direct labor per hour increase? Was it related to an increase in wages due to a new union contract? Did we hire a more skilled workforce? How were we able to produce the units with fewer labor hours? Were we more efficient? Did we incorporate new processes that reduced the time needed to produce a unit?

Variable Factory Overhead

For variable factory overhead, we spent a total of $155 more than expected. Of this amount:

$1,085 more was spent due was due to the fact that the actual cost of variable factory overhead cost per hour, $3.50 was higher than the estimated cost per hour, $3.00.
$930 was saved because we needed fewer labor hours than expected to produce the units. We expected to use 2,480 hours but ended up using only 2,170 hours.

What caused the increase in variable factory overhead costs?

We will use the information we gather to review the performance of the production department manager.

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