Question

One subunit of Harris Sports Company had the following financial results last month:

Harris—Subunit X Actual Results Flexible Budget Flexible Budget Variance (F or U) % Variance (F or U)

Direct Materials \( 28,000 \) 25,900

Direct Labor 13,000 13,800

Indirect Labor 26,400 23,100

Utilities 12,300 11,300

Depreciation 25,000 25,000

Repairs and Maintenance 4,600 5,600

Total \( 109,300 \) 104,700

Requirements

1. Complete the performance evaluation report for this subunit. Enter the variance percent as a percentage of the budgeted amount rounded to two decimal places.

2. Based on the data presented, what type of responsibility center is this subunit?

3. Which items should be investigated if part of management’s decision criteria is to investigate all variances exceeding $2,500 or 10%?

4. Should only unfavorable variances be investigated? Explain.

Short answer

(1) The responsibility report is prepared in Step 1.

(2) The subunit is a cost center.

(3) The variances that should be investigated are indirect labor and repairs and maintenance.

(4) The favorable variances should also be investigated, for effective decision making.

Step-by-step solution

Preparation of responsibility report

Harris- Subunit X	Actual Budget	Flexible Budget	Flexible Budget Variance	Percentage Variance
Direct Materials	$28,000	$25,900	$2,100 U	8.11% U
Direct Labor	$13,000	$13,800	$800 F	5.80% F
Indirect Labor	$26,400	$23,100	$3,300 U	14.29% U
Utilities	$12,300	$11,300	$1,000 U	8.85% U
Depreciation	$25,000	$25,000	$0
Repairs and Maintenance	$4,600	$5,600	$1,000 F	17.86% F
Total	$109,300	$104,700	$4,600 U	4.39% U

Type of Responsibility center

As per the data provided in the question the subunit is the Cost center as the data is all about the cost of the business. The cost center has the main responsibility to look after the costs incurred by the company.

Type of Responsibility center

The following variances should be investigated as per the management’s decision criteria of variances exceeding the amount of $2,500 or 10%

1. Indirect Labor - $3,300 or 14.29%
2. Repairs and Maintenance – 17.86%

Should unfavorable variances be investigated

Both the unfavorable and favorable variances should be investigated by the company. The favorable cost variance represents that the costs are being cut which might impact the operations of the company in the future.