A division of Iowa/Illinois Corn Company produces seed corn for farmers throughout the Midwest. Jens Jensen became president in 20X0. He is concerned with the ability of his division manager to control costs. To aid his evaluation, Jensen set up a standard cost system.

Standard costs were based on 20X0 costs in several categories. Each 20X0 cost was divided by 1,520,000 cwt—the volume of 20X0 production—to determine a standard for 20X1 (cwt means hundredweight, or 100 pounds):

At the end of 20X1, Jensen compared actual results with the standards he established. Production was 1,360,000 cwt, and variances were as follows:

Jensen was not surprised by the unfavorable variance in direct materials. After all, corn prices in 20X1 averaged 10% above those in 20X0. But he was disturbed by the lack of control of fixed overhead. He called in the production manager and demanded an explanation.

1. Prepare an explanation for the large unfavorable fixed-overhead variance.

2. Discuss the appropriateness of using one year’s costs as the next year’s standards.

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20X0 Cost (thousands) S1,824 Direct materials Direct labor Variable overhead Fixed overhead Total 20X1 Standard (per hundredweight) S1.20 .55 1.05 1.60 836 1-596 2432 S6.688 $4.40 Actual $1,802 735 1,422 2.412 $6,371 Standard $1,632 748 1,428 2.176 55,984 Variance $170 U Direct materials Direct labor Variable overhead Fixed overhead Total 13 F 6 F 236 U $387 U