Kilgore Precision Machining (KPM) has a highly automated manufacturing process for producing a variety of auto parts. Through the use of computer-aided manufacturing and robotics, the company has reduced its labor costs to only 5% of total manufacturing costs. Consequently, the company does not account for labor as a separate item but instead accounts for labor as part of overhead.

Consider a part used in antilock braking systems. The static budget for producing 750 units in

March 20X1 is as follows:

Direct materials ……………….. $18,000*

Overhead

Supplies ………………………….. 1,875

Power ……………………………. 1,310

Rent and other building services … 2,815

Factory labor …………………….. 1,500

Depreciation ……………………… 4,500

Total manufacturing costs ……… $30,000

Supplies and power are variable, and the other overhead items are fixed costs.

Actual costs in March 20X1 for producing 900 units of the brake part were as follows:

Direct materials ………………. $21,840*

Overhead

Supplies ………………………….. 2,132

Power ……………………………. 1,612

Rent and other building services … 2,775

Factory labor ……………………. 1,618

Depreciation …………………….. 4,500

Total manufacturing costs ……. $34,477

1. Compute (a) the direct-materials price and quantity variances and (b) the flexible-budget variance for each overhead item.

2. Comment on the way KPM accounts for and controls factory labor.